Payroll Loans: 3 Best Options When You Need to Finance Payroll

Updated on January 31, 2020
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Every small business experiences financial upswings and downturns. Ideally, you’ll experience more of the former than the latter—but you also know that the reality isn’t always perfect. So, when funds are drying up, and you don’t have the financial bandwidth to cover your employees, payroll loans can be life savers.

Of course, it’s absolutely crucial that you make paying your employees a priority, no matter what. Not only is not paying employees a breach of trust, but it actually violates the US Department of Labor’s Fair Labor Standards Act. Docking employee pay also indicates that you’re not withholding payroll taxes, and you could become personally liable for recovering those expenses.

For all these reasons (and more), it’s important to leave room in your budget to cover employee wages. But sometimes massive expenses, downturns in the economy, the loss of an important customer, and so many other unexpected factors can wreak serious havoc on that budget—and covering payroll just isn’t viable without shuttering your business.

If that’s the case, look toward a short-term loan, a business line of credit, or invoice financing. If approved, these payroll loans can give you access to the cash you need to pay your employees, stat.


Payroll Loans for Small Business: Your 3 Best Options

These three small business loans are ideal payroll loans for two specific reasons: they’re fast, and they’re flexible.

If you’re in need of a small business loan, you might be tempted to apply for a bank loan or an SBA loan, since eligible borrowers can get super-high loan amounts at super-low interest rates. But the timeline for SBA loan approval and funding can take a while on these loans—around a month, in some cases—and, depending on the type of loan you’re going for, your allowed use of funds will be limited.

But if you’re looking for a payroll loan, you need that money fast. And you need to use that money for, well, a very specific purpose. The three loans below—short-term loans, business lines of credit, and invoice financing—can give you access to cash quickly, and there are no restrictions on how you can use that capital.

We’ll also show you a few of the minimum requirements you’ll need for a lender to consider your business loan application, plus what the average, successful business loan application looks like for each type of loan. (Keep in mind that every lender is different, so these stats are really meant to serve as ballpark figures to guide you to approval.)  

1. Best Quick-to-Fund Payroll Loan: Short-Term Loan

You might have to deal with an unforeseen emergency, or an avalanche of invoices. But your staff still needs to get their checks. This is where short-term loans are a great tool for small businesses. Granted, these loans aren’t the cheapest, but if you’re in a crunch, they can be a good choice.

Online lenders can approve eligible short-term loan borrowers quickly, and get them the financing they need. You can have cash in hand in literally a day in some instances. The repayment periods on these loans are often less than a year, which is one of the reasons they’re ideal for quick-fix situations—like making sure your staff gets paid.

What you’ll generally want to have to apply:

  • Time in business: 9 months+
  • Credit score: 550+
  • Annual revenue: $100,000+

On average, most approved customers had:

  • 2+ years in business
  • 600 credit score
  • More than $150,000 in annual revenue

2. Best Long-Term Payroll Loan: Business Line of Credit

If you anticipate that a bombshell expense will keep you from covering payroll for more than a few months, consider opening a business line of credit.

Unlike a short-term loan, whose terms typically run only up to a year or so, business lines of credit are revolving: You can dip into these funds whenever you want or need, and you’ll only pay interest on the money you actually use. Then, you can renew your line of credit once you’ve paid down what you’ve spent.

Because of their flexibility, business lines of credit are ideal financing solutions for most businesses to keep in their back pockets, regardless of their financial concerns. After you’ve sorted out your payroll, you can use your line of credit to replenish inventory, fill in cash-flow gaps, invest in new marketing materials… or pretty much any other working capital expense, as long as it’s within range of your assigned loan amount, and you’re certain you can pay your loan bills.   

After you finish your business line of credit application, you’ll know whether you’re approved within minutes. If approved, you can draw down on those funds immediately, too.

What you’ll generally want to have to apply:

  • Time in business: 1+ year
  • Credit score: 550+
  • Annual revenue: $100,000+

On average, most approved customers had:

  • 1+ year in business
  • 630 credit score
  • More than $180,000 in annual revenue

3. Best Payroll Loan for Newer Businesses: Invoice Financing

If you’re a B2B business waiting on a batch of outstanding invoices, then invoice financing could be the best way for you to reclaim that missing cash and cover employee wages.

Here’s how it works: A lender advances you cash, typically in the amount of 85% of the value of your outstanding invoices. The lender holds off on the remaining 15% until your customer pays you back, and, in the meantime, they’ll charge fees on that percentage.

Because of those fees, invoice financing can become expensive. But the great thing is that borrowers often have an easier time gaining approval for invoice financing than they do for other types of loans.

This may seem obvious, but invoice financing companies are really concerned with the value of your invoices. In turn, they’re a little less concerned with your business’s financial history and credit score—after all, in this case, it’s not contingent upon you to repay your loan. All the onus is on the customer.

So, invoice factoring companies are a little easier on potential borrowers during the underwriting process. If you’re a newer business with a shorter credit history or lower credit score—which lenders in other types of loan deals may view as a red flag—you’ll have a shot at being approved for an invoice financing loan, so long as they deem your invoices valuable.

And if you are approved for invoice financing, you can access that cash in as little as under one day.         

What you’ll generally want to have to apply:

  • Time in business: 6+ months
  • Credit score: n/a
  • Annual revenue: $50,000+

On average, most approved customers had:

  • 1+ year in business
  • 600 credit score
  • More than $130,000 in annual revenue


What to Do When You Can’t Cover Payroll

All of these payroll loans are excellent options to consider if you’re in a bind. But securing a loan should really be the last step in your can’t-cover-payroll contingency plan. We spoke to a few business owners about how they plan their payroll coverage—and how they reroute when that plan goes awry.

1. Plan

Pretty much every small business owner agrees on the importance of an airtight budget plan. We hate to advocate for paranoia, but it is wise to err on the overly-cautious side when you’re taking your budget into account.   

Lisa Chu, owner of Black n Bianco, says, “To ensure all of my employees are paid, we always overestimate our expenses. That gives us room to cover payroll if we do end up spending more than we intend. Planning for your unexpected expenses is the most effective way to manage your cash flow.”

Ideally, you’ve accounted for those unexpected expenses in your cash flow projections. Richard Walton, CEO of AVirtual, says that that data is crucial. It can help you plan for the possibility of not being able to cover payroll way ahead of time—and plan accordingly.

“The first few years of running any small business are fraught with cash-flow issues, and this can lead to situations where you can’t cover your payroll,” Walton says. “I’m sure that almost all of us have been in this situation.

The best thing you can do to avoid this issue in the first place is to have a robust cash-flow forecasting system. You should be able to forecast a minimum of one month in advance, and include projections for 20% above and 20% below. Your forecast should always be able to cover payroll, even when you’re 20% below.

If your cash-flow projections show that you’ll be able to make repayments, and cover payroll moving forward, then you can consider taking out a loan.”

2. Save

Once you’ve nailed down your projected financials over the next few months—or, even better, few years—then it’s time to start building up a cash cushion.

A little extra padding certainly helps Trave Harmon, CEO of Triton Computer Corporation, weather downturns, and ensure that his employees weather them, too.

“I’ve been in business for 17 years, and running out of cash for payroll has only happened once,” Harmon says. “At the time, I took out a short-term, two-week loan from the bank and applied it to payroll. It worked.

That was over a decade ago, but it’s been on my mind ever since. What I’ve learned is this: Over-save. For every $5 we make, we transfer $2 into our business savings account. These extra funds mitigate the effect of unexpected expenses, help our business expand, allow us to pay taxes, and, especially, cover payroll.”

If you need some help keeping track of your financials, and creating a resulting budget, choose business accounting software that’s as easy and intuitive as it is feature-laden.

3. Communicate

Even after planning and saving, at some point in your business, you may still find yourself without the funds to cover employee wages. Know that you’re certainly not the first small business owner who’s experienced this situation. What really matters is that you communicate openly with your employees, and assure them of your compensation plan.

“There was one occasion where we overspent due to an unexpected large expense for equipment,” Chu says. “It affected my ability to make payroll on time. It was very embarrassing, but I gave my employees a detailed explanation of what happened, and shared my plan to ensure that this didn’t occur again. I also told them I was going to borrow from friends and family to make sure they were all paid within the week.

Having a clear and transparent dialogue with my employees made them feel secure that this was a one-time event. My employees are the backbone of my business, and I do whatever I can to make sure they’re happy and feel secure working for my business.”

If you’re not sure how best to approach your staff—it is a sensitive issue, after all—Walton suggests presenting them with hard financial evidence, especially in the form of your budget plan and cash-flow forecast. That way, you can show your employees exactly why and how your financials went off track, and how a payroll loan (or other financial solution) will fit into your adjusted budget.

Above all, Walton says, “honest, open, and transparent communication eases concerns amongst the key stakeholders of your business, and it’ll reinforce their confidence and trust in you as a leader.”


How to Find the Payroll Loan That Works for Your Small Business

It’s best to design your business’s budget from the get-go so that you can always cover payroll. But sudden expenses, sales dips, and missing invoice payments can throw even the most meticulously planned budgets out of whack, and it can take time to get your business back into the swing of things.

And you also want to do everything in your power to keep your employees from bearing the brunt of that downturn. That’s when it may be time to look into a payroll loan.

Short-term loans, business lines of credit, and invoice financing are all excellent options if you’re in need of fast, flexible cash.

As is always the case, do some research to figure out which type of loan works best for your business, what you’re eligible for, and, most importantly, what you’ll be able to afford. If you lock yourself into a loan with sky-high interest rates, you might end up falling into a cycle of debt. Work with a loan specialist to ensure you’re getting the best deal possible.  

But when you do secure an affordable payroll loan, you’ll rest a little easier knowing that you can tide your employees over while you all work toward your next windfall.

Contributing Writer at Fundera

Caroline Goldstein

Caroline is a former Fundera staff writer and current freelance writer, specializing in small business and finance. She has an MFA in fiction from New York University. She loves finding creative ways to help entrepreneurs grow.
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