When faced with the unexpected, coming up with the capital needed to pay employees on time can be challenging. While it’s important to budget and allocate cash accordingly, financial challenges and unplanned costs are common for all businesses. The good news is, there are a variety of small business lending options that can provide you with the working capital you need when you need it most. Learn more about payroll loans and the best options for your business in this article.
What is a payroll loan?
Although it’s true that building a successful business takes time and talent – it also takes working capital. A payroll loan may be just the thing you need if you have an unexpected expense that occurs between paydays. Payroll loans are short-term loans or advances that allow you to borrow a small amount of money to ensure that your employees are paid on time – leaving you to focus on daily operations.
Let’s take a closer look at small business lending options that are meant to cover payroll for your business.
How payroll loans work
As a small business owner, you understand the ebbs and flows of cash coming in and out of your business. However, there may be times when you experience more ebbs than flows. Payroll loans are specifically intended to cover the cost of maintaining your staff during financial lows. Since payroll loans are meant to cover a short-term need, they will generally have terms of one year or less with rates or fees that vary based on the type of payroll loan you choose.
Additionally, payroll loans will typically require daily or weekly payments since they are short-term in nature in terms of repayment. However, payroll loans can provide access to cash quickly with little to no restrictions on how you use it and when.
When a payroll loan makes sense
It’s no exaggeration when people say that “every penny counts,” especially when it comes to running a successful business. You have fixed costs, variable costs, one-off costs and overhead that need to be budgeted for when it comes to keeping daily operations afloat. Not to mention emergencies and offsetting the slow seasons. The last thing you want to do is have to cut costs or sacrifice areas of your company to save others. Although it’s important to put money where it will have the biggest impact, it’s also important to maintain the areas that make your company unique and stand out.
Consider taking out a payroll loan if you are unable to pay your employees on time, but your cash flow projections show that you’ll be able to make the required repayments. It’s one thing to be able to take out a loan, but making sure you can meet daily, weekly or monthly payments will not only help pay off the loan quickly, it will also get your business back on track – fast.
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The best loans to use for payroll
When most people think of a small business loan, they think of a traditional five- or ten-year term loan. However, many short-term loan solutions exist for working capital that can help cover payroll expenses.
- SBA loan: The Small Business Administration is a government-funded entity that provides government-backed loans through partners who can distribute funds when capital is needed. Most SBA loans are repaid with monthly payments of principal and interest and can be used for making sure your staff gets paid on time.
- Short-term loan: A term loan is a flexible lending option that provides your company with access to capital on a need-to basis. Once your company has been approved for a set amount, it will be deposited into the business bank account for immediate use. Short-term loans provide you with the working capital you need, and the ability to pay it off quickly. Since short term loans are repaid relatively fast, they are a great option for monthly expenses such as rent or payroll.
- Line of credit: A line of credit is a flexible funding option that can be accessed by small businesses as a kind of revolving capital that works similarly to a credit card. Your business will be approved for a set amount of credit which then allows it to draw on that amount when needed, only paying fees on the balance that you owe. Since you are only drawing out the exact amount you need, taking out a line of credit may be a great option for an infrequent cash bind.
How to qualify for payroll loans
Lender qualifications may vary based on criteria and eligibility. However, many traditional lenders look at your credit history and scores to determine the maximum amount of financing they can offer your business. Generally, alternative lenders will focus less on your credit and more on how long you’ve been in business and your annual revenues, which give an indication of the business’s ability to repay the loan.
Since payroll loans are designed for short-term and fast financing, you’ll find that many alternative lenders typically offer simple, online-based applications that, if approved, can provide you with funding in as fast as one day.
How to get a payroll loan
Applications from alternative lenders can be completed online while traditional lenders will most likely require an in-person meeting to discuss your lending options. While filling out the application, you may be prompted to provide some general information about your business and your financial history so make sure you have the required documentation on hand. Doing so will make the process as seamless as possible.
When applying for a payroll loan, you should expect to be asked to provide the following:
- Business plan: Most loan applications require a sound business plan to be submitted with the loan application. Lenders need to see what you plan to put your equity toward and what you plan to gain from your investment.
- Financial statements: Many loan programs require one year of personal and business bank statements to be submitted as part of the loan package which includes a detailed report of revenue and expenditures.
- A business banking account: Having a separate business bank account can make your accounting easier to manage. This also provides you with the opportunity to present clean financial records that are indicative of your business financial records. This will also be the account your lender will use to transfer funds.
- 3 months of bank statements: Your lender will closely review bank statements to gain a better understanding of your business history.
- Business license: Lenders need to ensure you are licensed in your state to operate your business lawfully.
- Legal documents: Legal documents required by your lender may be in the form of:
- Articles of incorporation
- Copies of contracts you might have with third parties
- Franchise agreements
- Commercial leases
- Tax returns: Your company’s income tax returns can illustrate business performance which is an integral part of the loan application process.
The exact required documentation will vary based on lender and loan type but being prepared will help alleviate any unnecessary back and forth that may prolong the approval process.
Ensuring that you can pay your employees on time every time is a key component to running any successful business. So having the ability to take out a short-term, flexible payroll loan can help provide a sense of security for both you and your employees.
If you would like to learn more about the best small business loans for payroll, call one of our lending experts at Rapid Finance today: 877-252-0827.