Should You Take Out A Payroll Loan For Small Businesses?
You have just launched your small business and you have a few employees. Still, until you generate sales, it is going to be difficult to pay them. Missing payroll can have long-term consequences, such as losing your workforce and customers. However, securing a small business loan from a bank or other traditional lenders may take too long if you need the cash now.
A payroll loan for small businesses can help you keep your business open and employees satisfied. Read on to see how they work.
The Different Types Of Payroll Loans
There are three common ways you can access short-term financing to help you cover payroll.
- Short-Term Loans: A short term loan from an online lender is a good option for covering payroll until expected income arrives and your cash flow improves. The process of applying is easy and the turnaround time on your application is short.
- Business Line Of Credit: This is a flexible, revolving loan that can be used to cover your payroll. Your bank establishes a line of credit limit and you borrow as much as you need when needed. After you pay back what you have spent, the limit returns to the original amount. A business line of credit is available to cover other cash-flow gaps too.
- Invoice Financing: It is not unusual to have customers who pay late, make partial payments, or do not pay at all. You have already fronted the expenses of providing products or services to them. A third option is invoice financing. A lender advances you cash equivalent to a percentage of your total outstanding invoices, typically around 85%. The lender charges fees on the advance. This is different from invoice factoring, where the lender takes ownership of your outstanding invoices.
When To Apply For A Payroll Loan For Small Businesses
- Your Business Has Slowed: Some of your customers are late paying their invoices. You know that cash will be coming in, but right now you do not have enough working capital to meet your obligations. You do not want to tell your employees that you cannot pay them. One of the best loans for small businesses facing this situation would be a payroll loan. It will cover you until outstanding revenues arrive.
- Your Business Is Seasonal: To get ready for the upcoming season, you need to hire seasonal employees. There is no room in your operating budget right now for these additional expenses. The sales that you make during the season carry you for most of the year, but it will take time before you see that money. If you cannot pay for seasonal employees, you will not be able to open. A short term loan can help you overcome this challenge at this critical juncture.
- You Are In The Construction Business: Several large clients are late in paying their invoices. Your cash flow is in free-fall. If you cannot pay your contractors and subcontractors on time, you risk losing them. Without contractors, you cannot complete projects and may lose opportunities to bid on future projects. Invoice financing might be the best solution. You receive an advance on as much as 85% of the total outstanding invoices and once the customers pay, you are in a position to pay the lender back.
How To Apply For A Payroll Loan
Qualification criteria depend on which payroll financing option you choose. However, there are some general guidelines:
- To qualify for a business line of credit, you must have been in business for at least two years, own assets in your business, and have a good credit history.
- Invoice financing is simple and quick. The amount you can finance depends on your credit history and the quality of your invoices. Applications can be completed online. This is a good option if you are in the retail, construction, or manufacturing industries.
- Most payroll loan resources can be found online. Less documentation is required than when applying for a bank loan. In addition to your business name and personal information, you will need to attach the following business documents:
- Business tax returns and bank statements
- Your P&L and other relevant business financial statements
- A list of outstanding debt if any.
Conclusion
Paying your employees on time should always be a priority. Even if you have covered all possibilities in your financial projections, unexpected cash flow disruptions can arise. If you are a new business, seasonal, in the real estate industry, or challenged by long billing cycles, there will be times when you need payroll financing.
A short term loan to cover payroll, a business line of credit from your bank, or invoice financing are important tools for every small business. Be sure to select the appropriate method that will bring relief and keep you in business simultaneously.
