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Should Your Business Consider Payroll Loans?
October 08, 2018
Payroll-Loans

Should Your Business Consider Payroll Loans?

Imagine yourself in this situation: it’s time to submit payroll and you’re afraid you don’t have enough money to meet your obligations. Business has been slow and one of your customers is a week late paying an invoice. You know cash will be coming in soon, but right now, you’re in a bind. If you find yourself in a situation like this where you need quick cash to pay your employees, you might benefit from a payroll loan.

Payroll loans are short-term loans or advances in which you can borrow a small amount of money to meet an immediate need, like paying employees. If you take out a payroll loan, you’ll receive money quickly, usually within one business day. Still, as you might expect, payroll loans can be expensive, and the lender will want to be repaid as soon as possible. It’s also important to note that payroll loans shouldn’t be confused with payday loans, which are short-term consumer loans that charge borrowers an average interest rate of 400 percent (and aren’t even legal in some states).

How to Determine if a Payroll Loan Is Right for Your Business:

Types of Payroll Loans

A ‘payroll loan’ is usually a broad description for short-term financing designed to smooth a company’s cash flow. If you can’t pay your staff, you’ll have more than just angry employees on your hands; you’ll also have to deal with government regulators. Payroll loans usually come in one of the following forms:

Short-Term Loans: 

Many online lenders can process short-term payroll loans in a single business day, but you’ll typically need to have a personal credit score in the 600s, a year of business history, and proof of business income. The lender will likely provide short term and could potentially request that you leave a postdated check for the full amount with them to ensure that they’re repaid.

Cash Advances:

Instead of taking out of loan, you can sell a portion of your business’s future credit card sales in exchange for immediate funding. Cash advances can be more expensive than business loans in some cases, but they can also be easier to qualify for since your credit score isn’t considered; only your credit card sales are examined.

Invoice Factoring:

Do you have unpaid invoices sitting on your desk? If so, you can borrow money against that invoice using a method called invoice factoring. Through invoice factoring, you’ll get a cash advance up to 85 percent of the invoice total and can use the unpaid invoice itself as collateral. Since the invoice is the collateral, you won’t need to show business statements or credit scores.

Who Benefits from Payroll Loans?

A payroll loan should only be used as a last line of defense against bad financial situations. Interest rates on these types of loans can reach as high as 30 percent, so you’ll want to carefully consider all options before choosing a payroll lender. Below, you’ll find a few situations in which a payroll loan might make sense for your business:

1. You’re facing a short-term cash shortage

Cash flow isn’t always a smooth cycle. Sometimes, a big business expense might leave you a little short on money when it comes time to do payroll. If you know you’re getting paid by a customer in less than a month, a short-term loan (that you can repay quickly) could keep your business stable.

2. You’ve hired extra workers for an expected surge in sales

If you own a seasonal business, you might have funding fluctuations between your slow and busy times. For example, if you run a coastal vacation business, you might need to hire extra employees in the spring to prepare for the summer season. During this period, you might not have enough revenue to pay your new help. Luckily, a payroll loan can fill that gap, so all employees get paid before the summer rush hits.

3. You haven’t been approved by traditional lenders

If you can’t get approved for traditional business loans but need to send  paychecks out as soon as possible, a payroll loan could be your only option. Taking a hit on a 15-30 percent interest rate payroll loan is better than facing the consequences of not paying your employees!

Final Thoughts: Consider if Payroll Loans are Necessary for Your Business

Payroll loans are quicker and easier to get than SBA or bank loans and you’ll receive the funding almost immediately. Still, you should thoroughly examine the terms and conditions prior to applying. Payroll loans are meant as a last resort for most businesses and you’ll pay handsomely for obtaining quick cash. The penalties for missing payments can be steep as well, so be sure you’ve considered all other avenues before pursuing a payroll loan.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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