Resources | Cash Flow Management | September 5, 2023

Payroll Funding for Small Businesses

If funding payroll for your small business is a stretch, you’re not alone. Here’s how to cover payroll amid rising costs and lengthy invoice payment terms.

illustration of money jar, paycheck, graphs and charts

In 2023, a staggering 2 in 3 small business owners reported foregoing their own salaries due to cash flow issues.

The widespread struggle to cover payroll should not be surprising, especially considering the cash flow constraints that small to midsize businesses face. For example, inflation and supply chain disruptions have most likely raised your operating expenses and lowered profits. At the same time, a competitive hiring market could mean that you are paying employees higher salaries. Demand for your offering could also have fluctuated as buyer needs evolve in a post-pandemic world. If your business is seasonal, it is probably challenged by payroll costs even without these factors at play. 

Another reason you might be stretched to pay employees — and yourself — is lengthy payment terms. In recent years, companies have extended supplier payment timelines to preserve their own working capital, which could leave you waiting 60, 90 or more days for invoices to clear accounts receivable. This quickly becomes a problem when you’re low on cash and need to pay staff weekly, bi-weekly or monthly.

If your business is unable to pay employees on time or anticipates payroll gaps, here’s why cash flow management is so important and some options for payroll funding for small businesses.

Cash flow management and payroll funding for small businesses

As an entrepreneur, you probably understand the importance of cash flow. Even if sales are high and your business is profitable on paper, you can’t fund operations and pay employees without timely access to the cash from those sales. 

Monitoring and forecasting cash flow — a measure of money coming in and going out of your business — is crucial for funding payroll. A diligent cash flow management strategy allows your business to anticipate shortages and plan accordingly. If you need financing to support payroll, forecasting will show you when and how much cash you need to bridge the gap, which can also indicate the best funding solutions for your business.

If you’re unsure where to start, the cash conversion cycle (CCC) is a key metric that provides a snapshot of your business’s financial health and efficiency. The CCC measures how many days it takes your business to convert inventory and other investments into cash from sales. While typical CCC values vary by industry, the goal is to keep the number low, particularly if you need to build cash flow and meet payroll expenses. 

You can calculate the cash conversion cycle with the following formula:

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)


  • DIO = The average number of days it takes to sell inventory
  • DSO = The average number of days it takes to collect receivables
  • DPO = The average number of days it takes to pay bills

Ideally, your business should aim to lower DIO and DSO, and increase DPO — at least as much as you can without incurring late payment fees.

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)
The Cash Conversion Cycle

4 approaches to payroll funding for small businesses

Payroll funding allows you to pay employees on time while other sources of cash (i.e., your accounts receivable) are pending. Here are some solutions to consider.

Business loans

One option is to apply for a business loan from a bank. However, this might not be ideal for two reasons: First, securing a bank loan often takes time, and payroll funding usually requires a quick turnaround. Second, many small businesses don’t qualify for bank financing, especially during inflationary periods when interest rates are high and loan requirements are stricter. For short-term payroll funding, alternatives — such as peer-to-peer lending, equity crowdfunding and online lenders — might be more accessible for your business.


If you run a startup and offer a unique product, you may be able to attract investors to fund your venture. This approach can help you meet business expenses such as payroll without taking on additional debt. However, it does entail sharing business ownership, and the process of finding and securing investors can take time. 

A business line of credit

A line of credit is a revolving form of credit that functions similarly to a credit card. With a business line of credit, you can withdraw funds within your limit and pay them back monthly with interest. Unlike a business loan, you only pay interest on the funds you’ve used, which replenish as soon as you repay them. If you qualify for a business line of credit, it can be a useful way to cover short-term payroll needs, as long as the credit limit is sufficient.

Invoice factoring 

Invoice factoring is a cash flow solution that uses a third party to accelerate payments on your outstanding invoices. In simple terms, a factoring company or “factor” buys your outstanding invoices for 70% to 90% of their value. The factor then manages payment collection for these buyers and gives you the balance, minus factoring fees, once the invoice settles. While this approach can give you the cash flow boost needed to make payroll, traditional factors are known for high fees, confusing contracts and inefficient systems.

A new way to fund payroll

If you’re hesitant to take on more business debt but want to avoid the costs and processes associated with invoice factoring, there is another option. Innovative fintech companies have developed a new way to get paid faster, lower your CCC and increase cash flow. Enter: Early payment programs.

Early payment programs accelerate invoice payments — but unlike invoice factoring, they exclude a third-party factoring company. Instead, your buyers initiate the program, offering to pay invoices early in exchange for a discount. C2FO Early Pay helps you get paid faster while ensuring win-win terms for both you and your buyer. Here’s how it works:

  1. Your buyer invites you to participate in an early payment program that leverages the C2FO Early Pay platform.
  2. You register for an account and log in to view available invoices.
  3. You select the invoice(s) to request early payment on, select a discount rate and submit the offer to your buyer.
  4. If your buyer accepts, you receive payment, minus the discount, in as little as 24 hours via your usual payment process.

Because the program is set up and funded by your buyer, you can leverage this approach without any contracts or additional fees aside from the cost of the discount itself. For small to midsize businesses, this is often more affordable and accessible than other methods of payroll funding.

The bottom line on payroll funding for small businesses

Employees are the core of any business. Paying them on time and in full not only ensures business continuity but also helps you retain talent in an increasingly competitive hiring market. While struggling to make payroll can be disheartening, this situation has become a reality for many small to midsize businesses contending with economic uncertainty and extended payment terms.

Tracking your cash flow on a daily basis, as well as forecasting your cash flow over the coming weeks and months, is crucial for meeting payroll obligations and staying prepared when finances get tight. And while traditional financing options — such as loans and lines of credit — can temporarily fill the gap, early payment programs offer a new sustainable cash flow solution that can save you from acquiring more debt.

Click here to find out if any of your buyers already offer early payment incentives with C2FO.

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