Payroll Loans: How to Use Them

A payroll loan can save the day when you’re short on cash, but there are ways to avoid a cash flow emergency.
Jun 22, 2022

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A payroll loan is a short-term financing option business owners can use to pay their employees. When there isn’t adequate cash to cover payroll costs, a payroll loan may be a solution that helps ensure your employees receive their paychecks on time.

Payroll loans can cover costs such as salaries, hourly wages, commissions, bonuses, payroll taxes and employee benefits.

When a business may need a payroll loan

If a business doesn’t have enough money to make payroll, it’s typically experiencing an issue with cash flow — the money coming into and going out of the business. Some situations that can disrupt cash flow include:

  • Not receiving timely payment from customers.

  • Encountering unexpected expenses.

  • Offseason reduction in revenue.

  • Holding too much inventory.

  • Natural disasters or other disruptions to regular business.

Types of payroll loans

Compensating employees and paying associated payroll taxes needs to be a priority for every business. Not meeting payroll obligations can result in fines and legal action. Here are some options to consider when you need funds for payroll:

Short-term loan

Both traditional banks and online lenders offer term loans with short repayment periods. Finding the best rates and terms with a bank loan is typical, but they can also be challenging to qualify for. If time is important, as with a payroll issue, then applying to an online lender may be quicker. Some online lenders offer decisions within 24 hours and funding within a day or two.

Although they vary by lender, you can find loan amounts anywhere from $5,000 to $500,000 or more. Also, repayment periods could be as short as 12 months or extend to 36 months, or possibly more. When talking to the lender, consider asking if it offers benefits for paying the loan off early, such as waiving the remaining interest.

Line of credit

A line of credit is another financing option. Like short-term loans, you’ll typically get the best loan terms from a traditional bank, but you can expect faster processing time from an online lender. In fact, a line of credit may be your quickest option, with some lenders promising a decision in as little as five minutes.

One advantage of a line of credit is that you pay interest only on the amount you withdraw. However, it's not uncommon to have online lenders ask you to make weekly payments instead of monthly, and the repayment period could be as short as six to 12 months.

Invoice factoring

Invoice factoring involves selling your invoices at a discount to a factoring company and receiving cash for them. Invoice factoring can be an option for businesses with outstanding invoices and net terms from 30 and 120 days.

When you sell your invoices, you typically receive a percentage of the invoice amount upfront. After your customer pays the factoring company, you’ll receive the remaining amount, less a service fee. The service fee is to compensate the factoring company. The percentage you’re paid upfront and the amount of the service fee will be spelled out in the agreement you sign.

Invoice factoring can be a quick option to obtain funds. However, it can be expensive depending on the fee you’re charged. Also, it’s not an option for businesses that don’t invoice their customers.

Finally, it may be a long shot, but you can talk to your payroll provider to see if it partners with a small-business finance company that offers payroll loans.

Ways to avoid cash flow issues

Addressing cash flow issues can help you avoid payroll emergencies and the additional costs associated with financing the funds you need. Raising prices, reducing expenses and eliminating waste may be the most common ways to increase the cash you have on hand, but there are other things you can consider:

  • Create a cash flow forecast to estimate money flow in and out.

  • Analyze a customer’s creditworthiness before extending credit.

  • Extend the payment period of your suppliers, if possible.

  • Accept credit cards, electronic and online payment options.

  • Offer a discount to customers who pay early.

  • Set money aside as a cash reserve.

  • Budget for seasonal fluctuations in revenue.

  • Consult an accountant or other financial professional.

How Much Do You Need?

with Fundera by NerdWallet