There are many reasons why firms outsource payroll services, from reducing their fixed costs to minimising the potential for fraud which it is suggested costs UK businesses as much as £12bn per year through payments to non-existent employees, false sick leave claims, and claims for expenses not incurred.
The challenging trading conditions of the last two and a half years have also encouraged businesses to explore alternative sources of working capital. In addition to more conventional options (such as delaying payments or applying for funding under supply chain finance schemes) these now include sourcing liquidity from inventory and employee salaries.
Last year, US research firm Catalyst Research published a report calling on policymakers to focus on longer term, sustainable solutions to small business challenges. It referred to fintech innovation in the area of payroll to help small companies free up this capital in creative ways as well as giving workers access to money they earn closer to real time.
The firm argued that this concept – known as ‘pay asset finance’ – should be explored by the US Small Business Administration, noting that in the service sector labour can account for as much as 40% of business costs.
While the report focused on the benefits for SMEs, it also noted that pay asset finance could be used to convert some or all of a large company’s payroll into financed assets that could deliver significant liquidity to support growth while also increasing choice for companies looking to free up working capital.
While the concept remains in development in the US, on this side of the Atlantic a UK fintech called Hi has been offering businesses the opportunity to release working capital by externally financing their payroll without adding balance sheet debt.
The service is currently available to companies with more than 100 employees, although founder and chief executive, David Brown, says it is working on making available to smaller businesses with as few as ten staff.
In an interview published last year, Brown stated that employers were charged £3.50 per employee because his company is effectively re-engineering the client’s payroll. “The fee depends on the size of the business but is normally very competitive based on their current cost of capital,” he told Treasury Today.
Pay asset finance also enables businesses to give employees faster access to earned income by making salary payments weekly or even daily rather than at the end of the month. “The employee is not charged to gaining early access to their pay, which can form part of a firm’s employee benefit and retention schemes,” says Brown.
Brown would not be drawn on how many companies are using the service or how many employees are being paid this way, merely stating that partnerships have been signed with a number of large firms including IT services provider NTT Data. Hi has also partnered with Mastercard to develop a salary access card that gives employees access to their earned pay.
The company’s funding model is backed by a number of funders including global investment firm HPS Partners.
Brown says that for investors funding payroll, risk exposure is small. “Payroll is an payment commitment with low bad debt exposure,” he says. “With no lengthy payment terms, employers repay payroll after the two month deferral period plus their fee. Our platform underpins the whole process, using sophisticated data management to track payroll and provide transparency to employers, employees and payroll funders.”