Payroll Loans Simplified: How They Work & How to Secure One
If you’re a small business owner, you may have considered taking out a payroll loan to cover employee wages. Cash flow may be tight at times, making it difficult to cover staffing expenses. Payroll loans can be a short-term financing option that provides the necessary cash to continue operating.
In this article, we’ll cover how payroll loans work and the different types available. So if you’re considering a payroll loan for your small business, read on for everything you need to know.
What Is a Payroll Loan?
A payroll loan is a type of short-term financing that’s used to cover employee wages. The loan is typically repaid within a few weeks once the business has received payment from its customers. Payroll loans can be an expensive form of financing, so they should only be used as a last resort.
There are four main types of payroll loans:
- Traditional Loans: Traditional loans are typically repaid over a period of several months, with interest and fees charged on the loan amount.
- Lines of Credit: A line of credit is a revolving form of financing that can be used to cover employee wages. The line of credit can be used as needed, and the business only pays interest on the amount that’s been borrowed.
- Merchant Cash Advance: A merchant cash advance is repaid with a percentage of the business’s credit card sales. The repayment amount is typically based on the business’s daily or weekly credit card sales.
- Factoring: Invoice factoring is a type of financing that allows businesses to sell their invoices to a third party at a discount. The third party then collects payment from the business’s customers.
The type of payroll loans you secure will depend on your needs and financial situation. You should also compare loan offers from multiple lenders to ensure you get the best deal possible.
How Payroll Loans Work For Small Businesses
Payroll loans can be a godsend for small businesses struggling to make ends meet. The loans provide the necessary cash to cover employee wages, which can help businesses avoid layoffs or other cost-cutting measures. In challenging times, payroll loans can help businesses keep their employees paid and doors open. Aside from wages, payroll loans can also be used to cover other employee-related expenses, such as payroll taxes and health insurance premiums.
As short-term business loans, payroll loans are typically repaid over a period of several weeks. Once the business has received payment from its customers, the loan is paid back in full, plus interest and fees.
Pros and Cons of Payroll Funding For Small Businesses
There are both pros and cons to using payroll loans to finance your small business. Here’s a look at the benefits and drawbacks of this type of financing:
Pros:
- Get the necessary immediate cash to cover employee salaries
- Cover other employee-related expenses, like taxes and insurance premiums
- Usually repaid over several weeks, giving you time to generate sales and repay the loan
Cons:
- Can be expensive, with high interest rates and fees ranging from 10% to 30%
- Because the repayment period is short-term, it is not ideal for long-term financing needs
- Typically only available to businesses that have been in operation for at least six months
- Might not be available to businesses with poor credit.
How To Qualify for Employee Payroll Loans
To qualify for payroll loans, most lenders require that the business be in operation for at least half a year and have a minimum monthly revenue of around $10,000. The business must also have a good credit score to be approved for financing.
In addition to these requirements, payroll loan providers usually ask for the following documentation:
- A list of employees, their salaries, and the number of hours they work
- Proof of revenue, such as bank statements
- Tax returns
- Business debt schedule
When trying to secure employee payroll loans, it is important to compare different lenders. Be sure to read the terms and conditions carefully before signing any loan agreement because some lenders have hidden fees or prepayment penalties.
Interested In Payroll Funding For Your Small Business?
LendThrive is one of the most well-reviewed fixed-rate business loan providers. We offer financing of as much as $150,000 at a steady rate throughout the term.
As a small business owner, you know how important it is to keep cash flow moving. A payroll loan can help you do just that by providing funding for your operational needs. Payroll loans are easy to qualify for, and there are many providers out there who can offer you competitive rates.
With a fixed-rate business loan from LendThrive, you can have peace of mind knowing that your loan payments will never change. Plus, you can pay off your loan at any time without penalty. Focus on growing your business and leave the financing to us.
Get started today and see how we can help. Apply online, and get approved in as fast as 24 hours.
