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Next to inventory or rent, payroll can be one of the biggest monthly expenses for many business
owners. On top of the actual payroll expense companies like Paychex or ADP also charge additional fees. Additionally, payroll costs rarely align with cash flow if you pay your employees on a weekly or bi-weekly basis when 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 loans 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.
Get Payroll Loans Funded As Fast as Same Day!
Do you have an immediate payroll expense. Shield Funding offers competitive rates on all its payroll funding programs and can get you funded the same day you apply. We have been assisting business owners for almost two decades with a five star rating.
What are Payroll Loans?
Payroll loans are financial products designed to help businesses cover their payroll expenses, especially during times when cash flow might be tight. This type of “payroll” loan simply refers to how one will use the money instead of a particular type of loan. They can be particularly useful for small businesses that experience inconsistent revenue streams or unexpected expenses. These loans ensure that employees are paid on time, which can be crucial for maintaining morale and trust within the company.
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 660 (subject to change)
- 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. While a bank should always be the first stop for borrowers, the reality today is that it is extremely difficult to get business funding during the tough inflationary environment today and exploding rates. Once a bank has been ruled out, below are some types of financing one might pursue from private or alternative lenders.
Types of Payroll Loans Available
- Unsecured Small Business Loans: These loans don’t require any collateral. They are primarily based on the creditworthiness of the business, making them suitable for businesses with strong credit profiles. It is important to point out that almost any loan that you do not provide collateral is unsecured, so lines of credit, MCAs, working capital and more. So many of these loans can serve as a payroll funding option.
- Secured Business Loans: These loans necessitate collateral, which can range from assets like real estate to equipment. They often come with lower interest rates due to the reduced risk for lenders. If you have the collateral and the lender offering this product it can be a great choice to fund payroll.
- Business Line of Credit: A 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.
- Short Term Business Loans: These business loans are characterized by their brief repayment terms, typically ranging from a few months to a year. They can be beneficial for addressing immediate financial needs but may come with higher interest rates.
There are many financial instruments that fall under this umbrella term. For example, merchant cash advances generally have terms under 2 years. This, and any type of borrowing under three years is a short term business loan.
- 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 often buy your outstanding invoices at a discount and collect 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 Advance: 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 if looked at on an annual basis. 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 business loan, business credit card, or short term business loan could all have a much lower cost of capital and be better for payroll expenses.
- SBA Loans: These are loans backed by the Small Business Administration. Programs like the 7(a) can be utilized for a variety of business expenses, including payroll, and often come with favorable terms and rates. These loans however take a lot of time, and may have restrictions on how they can be used, so unless there is a sufficient window of time and offered is a financial product that can be utilized for employee costs this is not going to be a good option for payroll.
When Should a Business Consider Payroll Loans?
- Cash Flow Gaps: There are times when there’s a delay in receiving payments from customers, yet payroll obligations remain. In such situations, a payroll loan can be a valuable tool to ensure timely payment to employees.
- Growth Phase: When a business is in an expansion phase, there might be a need to hire new employees or contractors. A payroll loan can provide the necessary funds to cover these additional payroll costs, ensuring smooth business operations.
- Unexpected Setbacks: Unforeseen challenges, such as a global pandemic, can severely impact revenue. In these scenarios, payroll loans can be a lifeline, ensuring that employees are compensated and business operations continue. These are just some of the ideas to consider when deciding if a payroll loan is right for you.
When Should a Business Not Consider Employee Payroll Loans?
While specific reasons might vary based on individual business circumstances, generally, businesses should avoid payroll loans if:
- There is consistent and sufficient cash flow to cover payroll without borrowing. There is no need to take on additional debt.
- The cost of the loan (interest and fees) outweighs the benefits. It is not worth borrowing if you end up worse off than where you began.
- When a company takes on debt without a clear plan for repayment.
Where to Get Payroll Loans
- Traditional Banks: Many banks offer various business loan products and they should always be considered first. They often provide competitive rates but might have stricter qualification criteria and a longer application process.
- Online Lenders: A wide variety of private lenders only do business online without brick & mortar operations. These lenders often have a streamlined application process, and approval times can be faster than traditional banks. However, interest rates might be higher.
- Credit Unions: Credit unions are member-owned institutions that often offer favorable loan terms to their members. They can be a good option for businesses looking for personalized service.
- SBA-approved lenders: These lenders are approved by the Small Business Administration to offer SBA-backed loans. These loans often come with favorable terms and can be used for a variety of business purposes.
- Factoring Companies: For businesses considering invoice factoring, factoring companies specialize in this type of financing. They purchase unpaid invoices from businesses, providing them with immediate cash.
Average Interest Rate for a Payroll Loan
The interest rate can vary widely based on the type of loan, the lender, the creditworthiness of the borrower, and other factors. Rates can range from as low as 3-5% for some SBA loans to well over 20-50% for short-term loans or MCAs.
Requirements for a Payroll Loan:
It should be mentioned that these are general requirements for most types of business funding. There can be a lot more depending on a particular lender and the type of funding being requested. Here are some of the most common requirements for a payroll loan:
Below is a list of the requirements to get approved for business funding with most basic funding programs. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
- At least 3 months in business
- Proof of consistent revenue & cash flow
- $10,000 Min. Monthly Revenue
- Business & Personal Credit Scores
- Duration of time in business
- Collateral (for secured funding)
Alternatives to Payroll Loans
- Business Credit Cards: Business credit cards can be an excellent tool for managing short-term expenses. They offer the flexibility of revolving credit, allowing businesses to make purchases and pay them off over time. Additionally, many business credit cards come with rewards or cash-back programs, which can provide added value to businesses.
- Personal Loans: In situations where the business might not qualify for a traditional business loan, business owners with strong personal credit can consider personal loans. These loans are based on the individual’s creditworthiness and might offer competitive interest rates. However, it’s essential to remember that the business owner becomes personally liable for the loan.
- Equity Financing: Equity financing involves raising capital by selling shares or stakes in the business to investors. This method doesn’t require repayment like a loan but does dilute the owner’s ownership percentage. It’s suitable for businesses looking for significant capital injections and willing to share future profits with investors.
- Crowdfunding: Crowdfunding platforms like Kickstarter or GoFundMe allow businesses to raise small amounts of money from a large number of people. This method is especially popular for startups or businesses with innovative products. It not only provides funds but also validates the demand for a product or service.
- Grants: Grants are non-repayable funds provided by governmental bodies, non-profit organizations, or private entities. They are often awarded based on specific criteria or for particular purposes, such as research, community development, or innovation. While they don’t need to be repaid, they often come with stipulations on how the funds should be used.
Ways to Avoid the Need for Payroll Loans
- Effective Cash Flow Management: Regularly monitoring and forecasting cash flow is crucial. By understanding the financial inflows and outflows, businesses can better prepare for future expenses and avoid potential shortfalls.
- Build an Emergency Fund: Setting aside a portion of profits for unexpected expenses can be a financial safety net. This fund can be used in emergencies, reducing the need to borrow.
- Invoice Promptly: Ensuring that invoices are sent out promptly and have clear payment terms can expedite payments. Faster payments can improve cash flow and reduce the need for external financing.
- Negotiate Terms with Suppliers: By negotiating extended payment terms or discounts with suppliers, businesses can improve their cash flow. This can reduce the immediate need for funds and provide more financial flexibility.
- Diversify Revenue Streams: Relying heavily on a single customer or revenue source can be risky. By diversifying revenue streams, businesses can reduce the impact of a single customer’s payment delay or loss.
Final Thoughts and Advice for Business Owners
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. While payroll loans can be a lifeline for businesses facing short-term cash flow challenges, they should be approached with caution. It’s essential to understand the pros and cons, the terms, costs, and implications of such loans and to explore all available options before making a decision.
Payroll Loans FAQ’s
As long as the basic paperwork requirements are in order and fast communication you can get your payroll loan in as fast as 2 hours.
You still can qualify. Payroll loans require a minimum credit score of 550.
There are no restrictions, you can use your payroll loan on payroll expenses or anything else.
Unfortunately we require at least 3 months of business revenues, your best option would be to apply for a personal loan.
The initial inquiry is a soft pull so you will learn all of your options without affecting your credit.
This is possible, but it will depend on how much of your first loan was paid back and some of your current information.
Shield Funding can match the rates on your payroll loan as long as the quote legitimate. Many other payroll lenders are not structured to match quotes.
For payroll loans it can be as little as 3 months but for better terms it would be better if you are in business at least 6 months.
No. We take pride in the privacy we offer our clients, and we never sell your private information.
Like any debt you default on it usually ends up with a collector over time. However, it is a good idea to contact your lender and explain your situation.