Payroll Loans: How They Work, Top Options, and How to Qualify

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Payroll Loans Overview

For up-to-date information on payroll loans available for business owners affected by the coronavirus pandemic, you can refer to our Paycheck Protection Program loans guide.

In essence, payroll loans are any form of debt financing that can provide business owners with the funds necessary to pay their employees. Generally speaking, payroll loans need to fund quickly enough for borrowers to be able to make payroll with a fast turnaround. Most lenders will consider payroll as a general working capital expense—so these small business loans are often synonymous with working capital loans.

If you think a payroll loan might meet your business financing needs, this guide is here to help.

The Ultimate Guide to Payroll Loans

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How Payroll Loans Work

Before we break down your best options for payroll loans, let’s start with the basics: How do payroll loans work?

To a certain extent, the way payroll loans work depends on the type of payroll loan you choose, on the whole, however, payroll loans are short-term business loans that provide you with the funding you need to pay your employees in-full and on-time.

Additionally, as we mentioned above, payroll loans cover a short-term need and require a fast funding time—and for these reasons, payroll loans are usually issued by online, alternative lenders.

Generally, payroll loans have terms of one year or less, with interest rates that vary. You’ll often see that due to their short-term nature and need for fast funding, payroll loans will have higher interest rates in comparison to other types of business loans.

As we’ll discuss below, the qualifications for a payroll loan will vary based on the type and lender, but overall, you’ll need to provide your basic financial information and credit score to complete an application.

In terms of repayment, once again, due to the short-term nature of these loans, you’ll see that lenders are more likely to require daily or weekly payments, as opposed to a longer-term monthly repayment schedule.

    Rates and Terms of Payroll Loans

    As we just mentioned, the rates and terms of your payroll loan will depend on the specific type of loan and the small business lender you work with. Generally, however, you can expect your rates and terms to fall within the following ranges:

    • Loan amounts: Up to $250,000
    • Interest rates: Starting at 10%
    • Terms: Three to 18 months
    • Repayment schedule: Daily or weekly
    • Funding time: As fast as one day

The 3 Best Payroll Loans for Small Businesses

If you’re looking for a payroll loan, you need capital fast and you need to use it for a very specific purpose. The three types of business 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.

Although it may be tempting to apply for a bank or SBA loan—as these loans will offer highly qualified borrowers the best terms and rates—these loans will require extensive application processes and will be slow to fund.

Therefore, it’s much more likely one of the three options below will be able to meet your needs for payroll—even though they will require a faster repayment period and will likely be more expensive.

Best Options for Payroll Loans

Short-Term Loan Business Line of Credit Invoice Financing
Best For
Quick-to-Fund Payroll
Long-Term Payroll
Newer Businesses
Terms
– Loan amounts from $2,5000 to $250,000
– Repayment term lengths from three to 18 months
– Interest rates as low as 10%
– Funding in as little as one day
– Credit limits of $10,000 to $1 million
– Repayment term lengths from six months to five years
– Interest rates that start at 7%
– Payroll funding as quickly as one day
– Loan amounts from $500 to $5 million
– Repayment term lengths that rely on when your customer fulfills the invoice
– Factor rates of ~3% per week until invoice is paid
– Provide payroll funding as quickly as one day
Requirements
– Time in business: 9+ months
– Credit score: 550+
– Annual revenue: $100,000+
– Time in business: At least one year
– Credit score: 550+
– Annual revenue: $100,000+
– Time in business: At least six months
– Annual revenue: $50,000+
Ideal Borrower Profile
– 2+ years in business
– 600 credit score
– More than $150,000 in annual revenue
– At least one year in business
– 630 credit score
– More than $180,000 in annual revenue
– At least one year in business
– 600 credit score
– More than $130,000 in annual revenue

Short-Term Loans

You might have to deal with an unforeseen emergency or an onslaught of invoices, but you still need to pay your staff. This is where short-term loans can be a great tool for small businesses. As we’ve already mentioned, these loans aren’t the cheapest on the market, but if you need business financing fast, they’re a worthwhile option.

Online lenders can approve eligible short-term loan borrowers quickly and get them the financing they need in as little as one 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.

These loans range in amount from $2,500 to $250,000, with interest rates typically starting around 10%. Although these rates may be higher than some other loans, they’re not completely unreasonable for fast financing.

If you’re looking for some of the top online lenders for your short-term payroll loan, you might start with OnDeck or BlueVine.

Business Line of Credit

If you anticipate that a large, unexpected expense will keep you from covering payroll for more than a few months, you might 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 to, and you’ll only pay interest on the money you actually use. Once you pay down what you’ve spent, your line of credit returns to its original total. 

Business lines of credit are ideal financing solutions for most businesses to keep in their back pockets, regardless of their financial concerns, thanks to how flexible they are. 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.

With a business line of credit, you might be able to access a credit limit anywhere from $10,000 to $1 million and repayment terms from six months to five years. Additionally, the interest rate with a business line of credit is more likely to be lower than a short-term loan—around 7%—and again, you can get this funding in as little as a day.

To get a line of credit to cover your payroll expenses, you might consider online lenders like Kabbage, Fundation, or OnDeck.

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 your employees’ wages.

With invoice financing, 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.

Although these payroll loans can be easier to get, they are often expensive. However, if you’re a newer business with a shorter credit history or lower credit score, you’ll be much more likely to qualify for this type of financing as invoice financing companies are often more concerned with the value of your invoices and your customer’s history of repayment than your business’s finances and credit score.

With this in mind, you can access invoice financing in amounts ranging from $500 to $5 million in as little as a day. As we mentioned, these types of payroll loans can be expensive, with factor rates of 3% per week until the invoices are paid.

If you think invoice financing might be the right option for your business, you might start with lenders like BlueVine or Fundbox.

How to Qualify for Payroll Loans

Now that you have a better sense of the best options for payroll loans—and some of the lenders that offer those options, let’s break down how to qualify for this type of business financing.

On the whole, the specific business loan requirements you’ll need to meet and the application process you’ll need to complete will depend on the particular product and lender.

This being said, however, as we listed in the chart above, you generally can expect to meet the following qualifications:

  • Short-term loans: At least nine months in business; minimum credit score of 550; minimum of $100,000 in annual revenue
  • Business lines of credit: At least one year in business; minimum credit score of 550; minimum annual revenue of $100,000
  • Invoice financing: At least six months in business; $50,000 in annual revenue

With this in mind, as with all types of business loans, the better your qualifications, the more ideal rates and terms you’ll be able to qualify for.

On the whole, because these payroll loans are designed for short-term and fast financing, you’ll find that these lenders typically offer simple, online-based application processes.

You likely won’t have to provide significant documentation, but you can expect to need:

  • Basic business and personal information
  • Business financial documents
  • Business and personal credit score
  • Business bank statements and tax returns
  • Existing debt schedule, if applicable

Again, one of the benefits of these types of financing products is that after you’ve submitted your business loan application, you can often receive funding as fast as one day.

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Payroll Tips From Small Business Owners

All of these payroll loans are excellent options to consider if you’re in a bind. This being said, however, securing a loan should really be your last resort if you can’t cover payroll. We spoke to a few business owners about how they plan their payroll—and how they reroute when that plan goes awry.

Plan for Ups and Downs

Pretty much every small business owner agrees on the importance of an airtight budget. Generally, it’s wise to err on the overly cautious side when you’re making your budget. 

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 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.

Save for Future Payroll Troubles

Once you’ve nailed down your projected financials then you can start building up a cash cushion.

After all, a little extra padding in your bank account always helps. Trave Harmon, CEO of Triton Computer Corporation, has a plan for this to help him and his employees get through rough patches.

“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.”

Harmon recommends over-saving. He says that at his company for every $5 they make, $2 goes into a business savings account. This way when the time comes that they need extra cash, they have it right there. 

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

Communicate With Your Employees

Even after planning and saving, at some point in your business, you might still find yourself without the funds to cover employee wages. If that moment comes, communication with your employees will be key and you should 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.”

That clear conversation is important for any business owner to have in order to help make employees feel considered and secure in their job. For Chu, having that conversation was so important to her because her employees are the backbone of her business, she says. 

It can be difficult to figure out how to explain the situation to your staff, but remember, they need to know. 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.”

The Bottom Line

Ideally, you’ll always have the money to cover payroll. This being said, however, sudden expenses, sales dips, and missing invoice payments can throw even the most meticulously planned budgets off course, and it can take time to get your business back on track.

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

As is always the case, you’ll want to 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.

Although it may take some to determine what’s right for you—and with payroll expenses, time is of the essence—you’ll nevertheless want to compare payroll loan options from different lenders to ensure you’re getting the best and most affordable deal for your business.

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Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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