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Should Your Business Consider Payroll Loans?
July 31, 2019
Payroll-Loans

Should Your Business Consider Payroll Loans?

Imagine yourself in this situation: it’s time to submit payroll but you don’t have enough working capital to meet your obligations. Business has been slow and one of your customers is a week late paying their 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 and need quick cash to cover payroll, you might benefit from a payroll loan.

Payroll loans are short-term loans or advances that allow you to borrow a small amount of money to pay employees. If you take out a payroll loan, you’ll typically have financing in your bank account within one business day.

Still, as you might expect, payroll loans can be expensive, and the payroll funding company 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. Payday loans aren’t even legal in some states, unlike payroll loans.

In this post, we’ll explain what payroll financing is, and how having access to it can help you pay your employees and in turn grow your business.

Everything You Need to Know About Payroll Loans:

The 3 Types of Payroll Loans:

A ‘payroll loan’ is 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:

1. Short-Term Loans: 

This type of loan has short terms because they are meant to be repaid quickly. Many online lenders 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. Also, the lender may request that you leave a postdated check for the full amount with them to ensure that they’re repaid.

2. Cash Advances:

Instead of taking out of loan, you can sell a portion of your business’s future credit card sales in exchange for lump sum funding. Merchant 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. Instead, only your credit card sales are examined.

3. 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 as collateral. Since the invoice is the collateral, you won’t need to show business statements or your credit scores to qualify with a factoring company.

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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 payroll financing can be as high as 30 percent, so you should consider all options before pursuing a loan from a payroll financing 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, paying for a big business expense (like an equipment repair) 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 pay a staffing company to recruit extra employees for your summer season. Before the busy season picks up, you might not have enough revenue to pay your new help. Luckily, a payroll loan can fill that gap, so all employees get paid prior to the summer rush.

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!

Conclusion: Determine if Payroll Loans Could Help for Your Business

Payroll loans are quicker and easier to qualify for 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 should be a last resort for most businesses, not a long-term funding solution. You’ll pay handsomely for obtaining quick cash, and the penalties for missing payments can be steep. Make sure you’ve considered all other avenues before pursuing payroll financing but remember that it’s available if you find yourself in a cash flow crunch.

Editor’s Note: This post was updated for accuracy and comprehensiveness in July 2019.

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].