Small Business Loans for Payroll
Next to inventory or rent, payroll can be one of the biggest monthly expenses for many business owners. Worse, it rarely aligns with cash flow if you pay your employees on a bi-weekly basis but your customers only pay monthly. Failing to pay employees on time could lead to angry servers waiting on tables and annoying customers, or good employees just walking out.
If you make the decision to rob Peter to pay Paul you could find yourself in a bad cash flow cycle. You delay paying vendors in order to pay your employees, but then receive late or untimely product shipments, which hurt sales, which hurt your ability to pay your employees…and it becomes a vicious cycle.
This is why small business owners often seek out business funding to cover payroll expenses. It is preferable to stay current with vendors and not experience any delay in receiving product but to also pay employees on time. Business loans for payroll will help you accomplish both and Shield Funding makes it easy to acquire business funding for your payroll expenses. You can apply online and can have an answer as fast as the same day you apply. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What are Business Loans for Payroll?
Funding which is meant to cover payroll needs should be, above all, flexible. If all of your employees are paid on a salaried basis, and payroll is consistent, this is less important. But for employees with many hourly employees, you will need funding that has some wiggle room for a fluctuating payroll amount.
You also might want your form of funding to be accessible multiple times. Once a loan is repaid you can no longer borrow from that same loan. To obtain more capital from the lender you would have to fill out another loan application. This could become burdensome if you frequently need to dip into funding sources to make payroll.
It is far better to think longer term and to apply for a form of capital that will cover payroll needs now and in the future. As well, repayment should not further hurt your business but should align better with your cash flows. In short, a business loan for payroll should meet the following criteria;
- Flexible funding
- Renewable funding
- Repayment that aligns with cash flows
These goals can be met with several different types of funding options. You should compare each of them to your business need to pick the one that is best for you.
Can I Get a Business Loan for Payroll From a Bank?
Banks will open lines of credit and business loans intended to cover payroll for small businesses, but it can be hard to qualify for their products. Typically, you need to meet the following to qualify for a bank’s business loans;
- A credit score above 620.
- Been in business longer than two years.
- Strong monthly and annual cash flows.
The qualifications vary between banks; Bank of America requires annual revenues of $100,000 to get one type of loan but other banks require more, and their rates all vary slightly. Your banker will likely suggest that you take out a line of credit rather than a term loan, as it will give you more flexibility to cover payroll fluctuations.
Keep in mind that these are the minimum qualifications. The underwriter could also require you to supply more documentation throughout the loan approval process. It’s not uncommon for them to request a five-year business plan, a few years of tax returns, bank statements, and financial statements.
If you’re an existing customer, you could have a better chance of being approved. That’s because the bank can see for themselves your business’s cash inflows and outflows, long-term trends, and have the reassurance of being able to access funds directly for repayment.
While you may be able to qualify for a business loan through a bank, by the time they have approved your application the reason you might have failed to cover payroll. Alternative lenders also offer business loans for payroll which have easier application processes and shorter approval times.
Types of Business Loans for Payroll
Not all of these options will be ideal in every situation. Some approve funding faster than others, and some will allow you to draw on the capital multiple times. Read about each to determine which will fulfill your needs.
Bad Credit Business Loans
Do not be scared off by their name, a bad credit business loan is not a bad loan. And, in the lending world, the term bad credit simply means that you do not meet a bank’s lending requirements. The advantages to bad credit business loans are many.
Because they are offered by alternative lenders bad credit business loans have extremely quick approval times. Credit score requirements are lower than that at a bank, and if your business has strong cash flows you can obtain funding with a score as low as 500. Banks prefer a minimum of two years of business history, if not more, but alternative lenders lend if you have only been in business a short while.
To qualify, your business must generate monthly revenues of $8,000 and above. Other than that, if you can supply proof of your identity and meet credit score requirements, you have good odds of being approved. Alternative lenders only request more documents unless it is an extremely high value loan nearer the higher of their lending range of $5,000 to $1 million.
Due to the shorter application and approval period, the lender will charge a higher interest rate. Interest rates are a reflection of risk, and on bad credit business loans they range from 12% to 45%. If you have a higher credit score, the interest rate could be comparable to other types of funding.
Alternative lenders who offer these loans know that business owners often need access to cash quickly to cover unexpected cash flow issues. If you think that you could struggle to meet your payroll obligation in the near future, contact an alternative lender today.
Business Lines of Credit
A small business line of credit or LOC is one of the best options for business owners whose cash flows do not align with the pay cycle. That is because a LOC is renewing. The line is kept open and capital can be accessed whenever you need it, but when you repay it you can borrow against it again.
The payroll applications are obvious. Borrow five grand for payroll on Friday, take in your weekend sales, and pay off the line of credit on Monday. A line of credit’s flexibility is why many financial advisors suggest that all business owners keep one open, just in case.
While a line of credit has an upper borrowing limit, like a credit card, it can remain open for one or more years or indefinitely. At some point, some lenders freeze lines of credit and convert them to term loans.
If you have not drawn on the line, you will not have to make a payment or pay interest. However, you could still have to pay an annual fee to have the line open if you are not using it. Some lenders also charge withdrawal fees when you take out money, so be sure to ask.
Documentation requirements for a LOC vary, and if you’re borrowing from an alternative lender all you might have to prove are your monthly revenues. Rates are usually lower than credit cards because there are some income verification and underwriting involved.
Business Loans with an Alternative Lender
You won’t find an alternative lender in a brick and mortar branch. Most of them operate online and lend from a pool of private or equity capital. Investors are promised higher returns than what they could get in the market, so alternative lenders take more risks to generate those returns.
While many borrowers have the impression that alternative lenders only work with bad credit, or are somehow subpar to a traditional lender, that simply isn’t true. If your credit score is high, their rates can be competitive with a bank. Many borrowers choose to work with them simply because they can turnaround a loan application quickly.
If you know that you cannot make payroll and its four days away, look to a business loan from an alternative lender. They can approve a loan in just 24 hours, and funds can be disbursed within 24-48 hours. The timeframe will depend on how much capital you need.
When making a lending decision, an alternative lender looks at your business’ monthly revenues and time in business. If you have a credit score above 500 and your business generates $8,000 of monthly revenues, you meet their minimum requirements.
What this means is that daily fluctuations in your bank account, and possible overdrafts, don’t matter as much when it comes to getting approved. If making payroll and cash flow management has been an ongoing issue, it won’t prevent you from getting a loan.
Small business loans at alternative lenders can be for amounts anywhere between $5,000 to $1 million. Unless you are borrowing at the high end of that range they are unlikely to request tax returns or bank statements.
The interest rates for loans from an alternative lender will range from 12% to 45%, but before you wince, some banks have rates that start at 13%. Don’t make the mistake of assuming that you will pay more to access capital with an alternative lender, particularly if you have a higher credit score.
Alternative lenders offer easy repayment terms to align with your business’ cash flow, which will not further hurt your ability to manage cash flow. Unlike a traditional lender, where you will likely have a large, once-a-month payment, you could pay back your loan on a monthly, bi-weekly, weekly, or even daily basis.
Working Capital Loans
The purpose of working capital loans is to provide the capital needed to keep your business operating, or working. Rather than financing an expansion or an acquisition of new inventory, it is simply meant to help you cover the expenses of your day-to-day operations. As such, it is a good solution for small business owners having difficulty covering payroll.
A working capital loan is short-term in nature, lasting anywhere from a year to three years. Minimum monthly required revenues are $10,000, and you can take out of a loan from $10,000 up to $1 million. If you borrow from an alternative lender you will only need to have been in business for two months and have a minimum credit score of 650.
Working capital loans can be approved in as little as 24 hours, and funds quickly disbursed. If you are facing an unexpected cash flow shortage and payroll is due on Friday, apply on Tuesday.
Business Credit Cards
Many small business owners use credit cards not only to finance their business in the early days but to manage daily cash flow.
Online applications can take just a few minutes to complete, but you can’t really control the amount a lender will give you. They might not approve you for the amount of capital you need to pay your employees, and you could have wasted valuable time applying.
The limits on credit cards and rates you will pay reflect that a credit card is an unsecured form of credit. The lender does not have the right to seize a piece of collateral, such as a car, for non-payment. And they are typically last in line of all your creditors to be paid if you default or declare bankruptcy.
A business credit card, just like a line of credit, is a renewable form of capital. You can cover expenses with it one day of the week, repay it when a customer pays an invoice, and then draw on that capital again later. However, it is not the best option for covering payroll.
If you have to take out a cash withdrawal or transfer cash from it into your business checking account, rates and fees are exorbitant. You can pay over 24% interest plus a fee of 5% of the withdrawal. And that’s on top of credit cards already high interest rates. Rates for business credit cards start around 14.49% and can get as high as 26.99%.
While a business credit card is an option, it is not the best solution for this type of cash flow problem. Most payroll checks must be paid from an actual checking account, and it can be difficult to convert the credit available to you into cash.
Your rate will fluctuate while you have the credit card if it is based on Prime, you could incur late fees or the company could raise your rate if you miss a payment. Annual fees on business credit cards are not uncommon, and the company could raise that fee every year.
If your credit score falls below 690 might not even get approved for a business credit card. While preferable to losing valuable employees when you cannot pay them, this is not your best option for financing intended to cover payroll obligations.
Business Loans for Women
To encourage and support female entrepreneurs, there are business loans and grants which are only available to women. The Small Business Administration or SBA runs Women’s Business Centers which host educational and networking events. Many loans and grants which are gender-based are very local, offered by charities and corporations in your city, and your Women’s Business Center could put you in touch with them.
The National Women’s Business Council offers education, too, but they also lend money directly to women business owners. They have alternative lending and grant programs.
Women’s Economic Ventures offers women-owned businesses start-up and expansion loans for amounts up to $50,000. It can take up to four weeks to be approved for a loan, though, so start early.
Some of the options available to female business owners do not approve loans quickly enough to cover payroll this week, but having them open in the future could help you be prepared.
Unsecured Business Loans
When you are newer in business, or have a lower credit score, many lenders prefer to lend based on collateral. They will ask you to pledge a business’ assets, or personal assets, to secure the loan. This obviously increases your risk.
While you should never borrow unless you are sure you can repay the loan, if you have to pledge assets it can also delay the time until funding. The lender may need to have your collateral appraised or verified, and by the time they have completed this step in the underwriting process payday could have come and gone.
As their name implies, an unsecured business loan requires no collateral. The loan is granted based upon your businesses monthly revenues, but you do not have to pledge them to secure the loan. Due to its riskier nature, the lender requires that you have been in operation for at least a year and the loan will have a higher interest rate.
Unsecured business loans can be quickly approved and the amount you are borrowing deposited into your bank account within a short period of time. While you will pay more to access the funds, you have less risk of losing an asset important to running your business. And you will still be able to pay your employees.
Invoice Financing or Factoring
Sometimes your business is generating plenty of money to pay your employees, but your customers are not paying on time. Enter invoice financing.
When you work with an invoice financing lender, they are lending to you on the basis of your past due receivables. You can either pledge them as collateral on a loan or sell them outright.
They will not give you 100% of the invoice’s face value, so do not expect to get a dollar for every dollar you are owed. Lenders hold back a reserve from advanced funds to protect them from customers who will never pay, and could only advance you 80-85% of the total invoices, or much lower.
Invoice factoring companies buy your outstanding invoices at a discount and collects directly from your customers. This can negatively impact your relationship with them if the company is rude when collecting.
Unless the invoice factoring lender has worked with you before, they might want to verify some of your customer’s credit scores and other information. It could take longer to be approved, so this might not be a good option if you are scrambling to find funding last minute.
Merchant Cash Advances
A merchant cash advance or MCA is another lending option to meet your needs. If your sales tend to fluctuate and you know you can repay the loan quickly, then it could be an excellent choice. An MCA is borrowing against your future sales, and repaying the lender out of your future sales.
To figure out how much credit to extend you, the underwriter will ask to see credit card or bank statements. From these, they will calculate average cash inflow. They want to know that you have money coming into the business and its frequency, so qualifying for an MCA can be easy and quick.
You don’t repay the advance until you are making money, and an MCA is repaid when you swipe a credit card. The lender takes a percentage which includes their principal and profit of each sale. This form of funding works quite well for restaurants and hair salons with high credit card sales.
Interest rates on an MCA can start at 15% and go up from there to the triple digits. Your agreement could allow your lender to continue to raise the rate if it is taking too long for them to be repaid. A fast loan, business credit card, or short-term business loan could all have a much lower cost of capital.
How to Find the Best Business Loan for Payroll
When shopping between lenders, ask questions to align with the criteria you need in a business loan. Include information on repayment, terms, and flexibility.
Other important items include any fees, whether it is an origination fee or an early prepayment fee. Whether or not the interest rate is fixed or variable could become an issue if you are not great at budgeting for payments which are not the same each month.
Request the APR, or annual percentage rate, from any lender that you are working with. It blends together both interest and fees to present a more accurate cost of capital. Two lenders may quote you the same interest rate but have vastly different APR’s. Choosing the lender with the lower APR could save you thousands of dollars.
Also, consider your lender’s reputation. If they have been in business for a long time, such as the ten years that Shield Funding has been operating, it indicates that they know how to responsibly lend and serve their customer’s needs. Look up their online reputations and reviews, and ask around your industry for recommendations.
The Final Word on Business Loans for Payroll
You could have all the time in the world or have to move quickly when taking out a business loan for payroll, but either way, take the time to compare your options. Talk to your lender and ask them to help you evaluate your needs and make recommendations. Call Shield Funding today to find out more about taking out a business loan for payroll.