Cash Flow Solutions

Payroll Loans for Small Businesses

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Cash flow gaps may be a persistent issue for small business owners, as they can impact your ability to meet payroll on a consistent basis. A payroll loan gives you the money you need to hire new employees and complete payroll. Payroll loans can also help cover the cash flow gaps that often occur when customer payments are delayed, but payroll must be issued. 

Can business loans be used for payroll? 

Yes. Operational expenses are a common use of small business loans. Payroll is also a revenue-generating activity, since your business depends on your employees to provide the goods and services your company sells. You can use a business loan for your payroll costs, including: 

  • Salaries, wages, commissions, and bonuses 
  • Paid time off and other benefits 
  • Social Security and Medicare taxes 
  • Local, state, and federal income taxes 
  • State and federal unemployment taxes 

While you can use business loans for other purposes, prioritizing payroll is a common use of funds. Missing payroll can hurt morale, lead employees to quit, and result in serious consequences. You may also have to pay penalties and interest to the IRS if payroll is not completed appropriately and on time. 

What is a payroll loan? 

A payroll loan refers to how you use the money rather than a specific type of loan. You can choose from different types of financing if you need money for payroll, such as an unsecured small business loan, secured loan, business line of credit, or alternative funding sources. Each type has its pros and cons, including how long it takes to receive the funds, the cost and loan fees, and the eligibility requirements. 

How do payroll loans work? 

Payroll loans will work differently depending on the type of loan. However, unlike with some secured loans (e.g., an auto loan where the lender pays the dealer directly), a payroll-loan lender won’t handle your payroll for you. 

You’ll generally have the funds deposited into your business bank account and can then use the money to run payroll. After you receive the loan, you’ll also start making repayments per the loan agreement. 

Payroll funding options 

You can get funding for your business expenses from various types of lenders and financial services organizations. Some of the most popular options are: 

Small business lines of credit 

A business line of credit is often a revolving credit account. Like using a credit card, your line of credit may have a maximum credit limit—you can borrow against your credit line until you reach the limit. You can also pay down your balance to free up available credit and take out new loans (or “draws”) without applying for a new account. 

Business credit lines give you the option of taking out a loan if you need money for payroll (or other expenses), and you’ll only pay interest or loan fees on the amount you borrow. There may be additional draw fees—similar to an origination fee on an installment loan—and some lenders may charge a maintenance fee or inactivity fee. 

Each withdraw may have a fixed repayment term and a variable interest rate or monthly loan fee. 

Small business loans 

A small business loan is either an unsecured or secured installment loan. With a small business loan, you may pay an origination fee and receive the full loan amount upfront. You’ll then repay the loan over a predetermined period, often with weekly or monthly payments. You could use this type of loan, for example, to cover the upfront costs that can come with hiring and training new employees. 

You may be able to find loans with either a fixed or variable interest rate. Variable-rate loans tend to start with a lower rate, while fixed-rate loans offer less risk because the rate doesn’t change. In either case, the interest will start accruing on your loan right away. 

Additionally, you may be able to choose between a secured or unsecured loan. Secured loans tend to be easier to qualify for and may offer lower interest rates, but you risk losing your collateral. With an unsecured loan, your eligibility and loan terms depend on your personal and business creditworthiness. 

Short-term loans 

A short-term business loan is a small business loan that has a short repayment term, such as three months to a year, and may have daily, weekly or monthly payments. These loans are often used for things like payroll, working capital, marketing or upfront costs associated with larger projects. 

Online lenders may be more likely to offer shorter-term loans than traditional lenders, and the loans may have less stringent requirements. However, the loans may also have higher interest rates or fees than longer-term loans. 

Invoice factoring 

Invoice factoring is an alternative form of funding that can quickly give you money for your payroll expenses—particularly if you frequently experience cash crunches while waiting for clients to pay your invoices. 

When you factor an invoice, you sell the invoice to a factoring company that pays you a portion of the invoice amount upfront. Your clients then send the invoice payment to the factoring company, instead of directly to you. The factoring company then keeps a portion for their service and forwards the remaining balance to you. 

Invoice factoring may only be an option if you sell to other businesses that pay you with terms (e.g., after 60 or 90 days). You will want to carefully review the terms of a factoring agreement to ensure you’re only factoring the expenses you need to cover and to understand any associates fees. 

Merchant cash advances 

A merchant cash advance (MCA) gives you an upfront payment in exchange for a portion of your future sales. While an MCA isn’t a traditional bank loan, it can offer fast funding that you can use for payroll. 

MCAs may be easier to qualify for than other types of loans or advance payments for certain businesses because they’re often based on daily sales rather than credit or collateral. However, you may need to accept cards or online payments and have those sales rerouted to the MCA provider, which may charge a fee before sending you the remainder. 

The laws that regulate small business loans don’t apply to MCAs—because they’re not loans—and the MCAs may charge high fees or take a large portion of your daily or weekly sales. 

When should a business consider employee payroll loans? 

A payroll loan could be a good option if you’re dealing with a one-off or short-term setback. 

A payroll loan could also be a good option when you’re continuing to grow your business. Sometimes you need to hire new employees or contractors because of anticipated growth or a large project. The loan can help you cover these upfront expenses until your business expands or make payroll. Or if sales have fallen short or you’re heading into a slow season, a payroll loan can help you bridge that gap. 

Applying for payroll financing 

Finding the right funding for your business can be challenging. If you’re looking for payroll financing, consider the lenders’ requirements, application process and how quickly you need the funds. 

Some lenders may offer an online application for a business line of credit. Once approved, businesses can access a credit line to support payroll and other business expenses. 


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