Imagine: Friday is payday and you’re out of cash. Maybe, clients are late paying their bills. Perhaps you’ve been hit with unexpected expenses or payments taking too long to clear your account. As a business owner, you don’t want your employees to suffer. But what can you do? Payroll loans can be a smart, short term solution to meet this challenge.
Payroll loans can help busy small business leaders stay on top of their most important cash flow issues.
When to Consider A Payroll Loan
If you’re in a bind and don’t have enough working capital to meet your payroll obligations, a number of solutions can help balance short term cash flows. One of the benefits of a payroll loan is that the funds are often deposited into your bank account quickly.
What Types of Loans for Payroll Exist?
Payroll loans typically come in four forms. Depending on your business setup and the amount of the loan, one of these options may be right for you:
In some cases, you may be able to get a cash advance on your credit card. However, this typically requires advanced planning. You often need to call a week or two ahead of time to request a pin. Credit cards often have low cash advance thresholds relative to your total maximum spending limits. Credit card cash advances can also have higher interest rates than other options.
Do you process client payments through a credit card merchant account? If yes, a cash advance might be a good choice. The lender looks at your sales and takes a percentage of your daily sales as repayment. This approach offers several benefits. Sometimes called revenue-based financing, merchant cash advances are tied to your daily sales. This method helps you quickly repay the loan while filling an immediate cash flow gap.
If you’re a service-based business or you provide products to customers on credit, then you’re probably sending invoices. Outstanding invoices represent projected future cash flow for your business. But when the terms are long such as net-30 or even net-90, waiting for clients to pay can create a cash crunch. When customers run late with payments, the situation can become dire.
Invoice factoring is a type of business funding that uses your unpaid invoices as collateral. You can collect a percentage of the total amount due now and repay the loan with the invoice is paid. Additionally, a related source of funding is purchase order financing. Purchase order financing allows you to get a cash advance against purchase orders, minus the cost of goods.
Line of credit
This is an open business loan that can be used at any time and for any approved purpose. Let’s say that you’re approved for $50,000. That’s the maximum that can be borrowed. Repayment happens only when you take money out. A line of credit is a flexible way to have credit available to your business in advance of a cash flow crisis.
Lines of credit may have lower interest rates than other types of payroll loans and more flexible repayment options. If this sounds like a good solution for your business, consider applying for a line of credit before you need it. Or, if the need to cover this week’s payroll gap is more frequent, a line of credit can be a long-term solution to smooth out a rocky cash flow situation.
Applying for a payroll loan is easy. Business owners can simplify the process by gathering the necessary information and outlining their needs in advance.
How to Apply for a Payroll Loan
A payroll loan is designed to be a quick solution to an immediate cash flow problem. Applications are evaluated quickly. And the more prepared you are, the sooner you’ll have cash in your business account to pay your team. Gathering supporting documents up front can expedite the entire process.
- Determine your cash flow gaps. How much funding do you need to complete your employee payroll?
- Based on your business structure, determine which solution might be right for you.
- Prepare the supporting documents. Gather basic information about your business, as well as your personal history.
- You’ll likely need to submit business references, a few months of bank statements, and a year’s tax return. You’ll need all of these documents to submit an application, which is often done online or over the phone.
- Additional documents might be required during the underwriting process. Speak to your representative to explore what unique requirements there may be.
Preventing Payroll Gaps in the Future
If you need a payroll loan to fix an immediate cash flow need, you’re not alone. Taking steps to keep your business afloat and your employees happy is essential to staying in business.
Therefore, advance planning could help you avoid issues in the future. Some strategies to consider include:
- Saving a “cash cushion”: Setting aside funds can be challenging, but building up a cash cushion makes it easier to weather storms. Consider establishing a savings account and putting aside a percentage of your profits each week, month or quarter. This emergency fund can be a first line of defense when things don’t go as planned.
- Applying for a line of credit: As discussed above, a line of credit can only be accessed as you need it. However, you need not wait until an emergency strikes to apply. In fact, obtaining a line of credit and having it in place before you need it is smart strategy. That way, if you experience a cash flow shortage, you’ll have an immediate solution available to you to meet payroll. Also, lines of credit are flexible and can be used for multiple operational needs.
Don’t let a cash flow crunch interrupt your business. Compensating your employees is a top priority and allows you to continue serving customers. As a business owner, it’s natural to experience financial challenges from time to time. Don’t panic if it’s almost Friday and an unexpected situation means you don’t have the cash on hand to pay employees. A payroll loan can help you streamline your finances in time for payday.
A wide variety of payroll loans can help you meet your obligations. Determine which option is best for your needs and then contact a lender today to discuss what’s available to you.