09 Jan Past Borrowing Habits Need Not Be a Barrier to Funding Your Next Payroll
Your small business can avoid endless paperwork required by big business banks with these tips.
We’ve seen this play out before.
The project is completed, you’ve delivered as promised, and the client is happy. But for whatever reason, they haven’t settled your receivable. Even large corporations occasionally miss payments or are late.
With funds not there to cover the payroll obligation a few days from now, what strategies will you use to handle it?
The health of your business is directly linked to the availability of credit. Owners know the best time to arrange for financing is before you need it.
According to the National Federation of Independent Businesses, 23% of business owners borrow regularly. Those who dislike borrowing may not want debt on their balance sheet or may struggle monitoring loan covenant provisions.
One way to prepare for unexpected events is to keep a large cash reserve. While this may help, opportunity costs exist when owners cannot redeploy funds for higher return projects.
We should be mindful about making financial mistakes when under pressure. For example:
- Tapping lines of credit having costly commitment fees. These often require collateral or an owner’s guarantee.
- Using factoring solutions. About 3% of U.S. small business owners used these costly arrangements in 2021. Letting others manage receivables puts stress on customer relationships when collection issues arise. Also, look for large “exit fees” due when ending the contract.
- Worse yet, dipping into the owner’s savings or retirement account may be required.
The Dreaded Loan Process
Loan applications at the big banks are likely to be denied if your history includes:
- A poor credit score, or factors including high debt-to-income ratios.
- Cash flow variation at critical times.
- Lack of collateral.
There are fees to pay, forms to complete, and time-consuming meetings with your banker, even with a good history. You are presented with mind-numbing terms and conditions to read and understand. Once funded, your loan must stay in compliance with all covenants and payment due dates, or risk being recalled.
There are alternatives to high-cost bank loans and crazy paperwork. Many business owners are not yet familiar with an emerging industry called “payroll financing”. It is likely available through their existing outsourced payroll provider.
While it is important to consider all financing options that will meet your needs, imagine the value of having a pre-approved line of credit just for payroll that can be requested and funded the same day. Now imagine incurring no cost for the credit until used.
Business owners run their companies with agility and expect the same from banking institutions. They want win-win relationships, fewer barriers to obtaining financing, and more options for covering unforeseen events that allow them to sleep well at night.
For owners with occasional issues around funding payroll, this new option might help reduce the stress involved.