05 Oct Small Business Loans For Payroll
Small business loans have been around for as long as small businesses have been in existence. More often than not, small businesses need a way to grow and develop their businesses, which usually requires funds for upfront and continual investments. However, small business loans for payroll work a little differently than traditional business loans.
Rather than getting “general” business loans to cover a wide range of expenses, payroll funding specifically pays for the cost of maintaining your staff. So, if you just need cash to help cover payroll until your invoices are paid, small business loans for payroll can help meet your needs.
What Is A Small Business Loan For Payroll?
As previously mentioned, a small business loan for payroll is an influx of cash that is specifically designed as a loan to cover payroll. These types of loans can go by several different names, but they are most often known as payroll funding or payroll financing. In any case, a small business loan for payroll works very much like any other type of loan; you work with a payroll financing company to determine your needs, your repayment options, and your interest rate.
However, payroll funding has inherent benefits that your business would not get with a traditional lender. First and foremost, the requirements to qualify for payroll funding are less stringent than many other types of loans. Additionally, with payroll funding loans, you avoid some of the high costs which you would normally entail with short term loans.
However, it’s important to remember that small business loans for payroll are designed to be short-term lending options for businesses that find themselves temporarily short on cash. For example, if your business operates in an industry with long invoice periods (30-90 days), you likely experience cash flow issues on a regular basis. As a result, you may need some cash until your clients and customers fulfill their debts with your company.
If you’re looking for a reliable payroll financing company that offers low fees, competitive interest rates, and flexible payment plans, you should consider a small business loan for payroll with Payro Finance.
Will A Bank Provide A Business Loan To Cover Payroll?
The short answer is yes, banks can and do provide business loans to cover payroll. They often do this through traditional business loans or lines of credit extended to qualifying businesses. However, these kinds of lending options are notoriously difficult to get, as your business will have to meet some pretty strict business loan requirements. As a result, if you need a quick influx of cash with a fast business loan, traditional lenders are usually not the best way to go.
In any case, when evaluating your application for a small business loan, banks will look at all of the following factors:
- Business Credit Score – If you make payments using a business credit card and have developed a credit history through your business, then your company has a business credit score that is completely separate from your personal credit score. Naturally, the higher your business credit score, the greater the chance that you can secure a small business loan through a traditional lender.
- Business History – In most cases, banks want to see that you have been in business for more than two years (at a minimum). This shows that you have a sustainable business model and will present less of a risk to the bank.
- Debt Equity Ratio – As the name implies, a debt-equity ratio shows your existing debt in comparison to your business equity. You don’t have to worry if you’re carrying some debt, but if you do not have enough equity to create a healthy financial balance, banks may not want to lend to you at all.
- Business Plan – Banks almost always want to know how you plan to use their funds. Even if you only use a business loan for payroll, the lender may still want to see a business plan to ensure that you have a solid foundation to pay back the loan in full.
- Collateral – Finally, some business loans require that you put up collateral to be used in the event that you cannot pay off the loan. This could include real estate, equipment, vehicles, or other tangible assets owned by you or your business.
If you’d like to learn more about the differences between payroll finance and a traditional business loan, be sure to check out our in-depth guide.
Payroll Funding Vs Other Forms Of Payroll Financing
Now that you know a little bit more about payroll financing and even traditional business loans from banks, it’s time to look at some of your other financing options. While payroll financing is one of the fastest, simplest, and most cost-effective ways to keep your staff paid on time, there are other ways to get cash for payroll. So, here are a few of the top alternatives to a small business loan for payroll:
Payroll factoring is a type of credit that is backed by a payroll invoice. In other words, your business gets cash to pay employees now, and once your invoice has been paid, you give a percentage of that payment to the factoring company (in addition to any lending fees). Since many staffing agencies are required to pay staff now and wait for invoices to be paid later on, payroll factoring for staffing companies is relatively common. In any case, you can check out our in-depth guide to learn more about Payroll Factoring vs. Payroll Funding.
Though it is frequently confused with payroll factoring, invoice factoring accounts receivable is a separate process entirely. When your business engages in invoice factoring, you effectively sell your invoices to an invoice financing company at a discounted rate. This means that you will get the majority of what your clients owe you now, while the invoice factoring companies will take over the responsibility of collecting payments from your clients. You can learn more about invoice factoring right here.
Merchant Cash Advances
A Merchant Cash Advance (MCA) is a type of business cash advance for companies that sell products or services. If you opt for MCA financing, the lender receives a small sum every time you make a sale. This means that you can essentially pay back the debt with micro-payments, but it also means that you see less profit from every sale you make. You can learn more about this process from our guide on Merchant Cash Advance vs. Payroll Funding.
Invoice discounting is the practice of using unpaid invoices as collateral when applying for invoice financing (also known as AR financing or bill discounting). If you choose invoice discounting to help cover payroll, you will get a portion of your future invoice payments upfront. This can be distinguished from invoice factoring because you are not actually selling your invoices to the lender; they are simply used as collateral. You can learn more about this process in our Invoice Discounting vs Payroll Funding guide.
Supply Chain Financing
Supply chain financing is also known as reverse factoring, as it is a process that must be initiated by the client(s) of a supplier. This makes it a rather unusual and somewhat uncommon practice. In any case, it works by allowing supply chain finance companies to pick which invoices they would like to purchase. Then, these companies pay a portion of the unpaid invoice values upfront and pay out the rest (minus fees) once they have received full payment. You can learn more about how supply chain financing works in our guide on Supply Chain Finance vs. Payroll Funding.
Loans From Family
Generally speaking, obtaining a loan from family can cost a lot less. However, using family as a source of finance can complicate your personal life and potentially put the future of your business at risk. As a result, it may not be the best option for your family or your business. In any case, you can learn more about the advantages and disadvantages of borrowing money from family for payroll right here.
So, are small business loans for payroll right for you? If you’re interested in learning more about the advantages of payroll funding, feel free to reach out to Payro Finance today!