Small business owners are expected to cover a wide range of expenses to keep their business afloat. One of the most consistent expenses is payroll. Whether your employees are full-time, part-time, or contract, you’re expected to consistently pay for their work.
What Is a Payroll Loan and How Does It Work
A payroll loan is a type of funding you can receive that helps you pay your employees. Since payrolls are considered a general working capital expense, credit and invoice financing lines are used as payroll loans.
Payroll loans for small businesses are short-term funds to pay your employees. Online, alternative lenders typically issue employee payroll loans to make sure you can pay your employees on time and in full.
Different Types of Payroll Loans
There are several benefits of payroll loans. These types of payroll loans give you access to funds quickly.
The Small Business Administration covers at least seven loans that can be used for payroll.
Business loans have long-term and short-term options available to small business owners who need assistance with payroll expenses.
Paycheck Protection Program
The Paycheck Protection Program offers your employees loans curated for payrolls, including wage, salary, parental, medical, family, vacation, sick leave, and health benefits. This is a temporary program that was funded by the U.S. Government during the COVID-19 pandemic. Please refer to government resources to check if this program is still available.
When Is a Payroll Loan a Good Idea?
You may ask, “Is a payroll loan a good idea during a financial situation?” Your employees work hard and paychecks must be paid on time. Since these loans are short-term, you’re likely to start daily or weekly payments for employee payroll loans.
A payroll loan is a good idea when you cannot pay all of your employees on time. Looking into a payroll loan is preferable to missing payments.
Depending on your number of employees, payroll costs will likely be one of your most consistent expenses. Unforeseen financial hardships can range from unexpected expenses to less business revenue than in previous months. In this case, it is important to know who is not eligible for a payroll loan and how to get a payroll loan.
Who Is Not Eligible for a Payroll Loan?
Many small businesses are eligible for payroll loans from the Small Business Association; however, it’s also important to know who is not eligible for a payroll loan.
Real estate investment firms, firms involved in speculative activities, and firms involved in lending activities are not eligible for an employee payroll loan.
Other ineligible businesses include charitable, religious, or other non-profit institutions. In addition, businesses or organizations that promote religious objectives are also ineligible.
How To Get a Payroll Loan
Here is a simplified list of instructions that show you how to get a payroll loan.
- Apply Online or Go to a Bank To Apply
- Gather Required Documents Needed for Funding
These documents are required when applying for lender approval.
- Social Security number or Tax ID
- Business licenses and filings
- Tax filings, profit/loss statements, balance sheets, bank statements
- Review individual lenders for additional required documents.
If Approved for a Loan
Carefully read through your loan agreement. This agreement will tell you the total amount of your loan, and the interest rate included. In addition, you’ll see the monthly payment; however, alternative lenders may have a shorter payment period based on the short-term agreement of your loan.
Best Payroll Loans for Small Business in 2022
The best three options for payroll loans for small businesses in 2022 are short-term loans, business lines of credit, and invoice financing. Understanding the types of payroll loans can help determine the best option for you.
If you’re in the middle of an emergency, where you cannot pay your staff, short-term loans are an excellent tool for small businesses to get money fast.
Usually, the loan must be between $2,500 to $250,000 with an interest rate as low as 10%. Short-term borrowers can access their funding in as little as one day. The repayment term ranges from 3 to 18 months.
Requirements for approval: Your business must be in operation for at least nine months. As the business owner, you’re required to have a credit score of 550+ and have annual revenue of $100,000+.
Business Line of Credit
A business line of credit is a helpful loan if you cannot cover payroll for more than three months (long-term payroll). This gives you the flexibility to handle the loan on your own time, meaning that you don’t make repayments or pay interest until you start using your approved loan.
Credit limits for long-term payroll loans are between $10,000 to $1 million with repayment terms from 6 months to 5 years, based on your use of this loan. The interest rate with a business line of credit is 7%, which is lower than a short-term loan.
Requirements for approval: Your business must be in operation for at least one year. As the business owner, you’re required to have a credit score of 550+ along with annual revenue of $100,000+.
If you’re a newer business, then invoice financing could be a way to gain access to cash that you’re missing to cover your employee’s payroll.
Loan amounts are from $500 to $5 million, giving you a larger window of opportunity to access the amount you need. The repayment term relies on when your customers fulfill the outstanding invoices and a factor rate of 3% per week until invoices are paid.
Requirements for approval: You’ll need to be in business for at least six months, have a credit score of at least 600 and annual revenue of $50,000+.
Having a planned budget keeps your business on track and always allows you to have money to cover your payroll. However, if you do need a payroll loan, it’s a good idea to know loan forgiveness works.
There are many benefits of payroll loans once you understand how to get a payroll loan. You’ll want to research the options above to determine which loans work best for you, what you’re eligible for, and what you’ll be able to afford in the long run. If you compare loan options from different lenders, you’ll ensure that you’re getting the best options for payroll loans for small businesses.
An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.