Payroll Financing Solutions for Small Business

What is payroll financing for small business?

Payroll financing for small businesses is a short-term funding solution used to bridge temporary gaps in cash flow and ensure timely payment of employee salaries and benefits. This can be crucial for several reasons:

• Unpredictable Income: Small businesses often experience fluctuating income, especially in their early stages. Payroll financing helps avoid delays or disruptions in employee compensation even when income hasn't yet caught up.
• Seasonal Fluctuations: Some businesses face significant peaks and valleys in their seasonal workload. Payroll financing provides a buffer during slow periods to maintain employee morale and avoid layoffs.
• Unexpected Expenses: Unforeseen costs like equipment repairs or sudden tax bills can disrupt even a healthy cash flow. Payroll financing ensures consistent employee payments amidst such emergencies.
• Funding Growth: Small businesses aiming to expand might require additional resources for hiring new employees or acquiring equipment. Payroll financing can aid in these strategic investments without jeopardizing existing employee compensation.

How does payroll financing work?

How payroll financing works will depend on the type of financing you choose. With that being said, due to the quick funding, they are typically all applied for online and offered by alternative lenders.

As payroll financing is short-term funding, they will generally have terms of up to 12 months and higher interest rates than long-term funding methods, although these will vary.

You are also likely to find that payroll financing is required to be paid back on a daily or weekly basis as opposed to monthly installments.

Why do small businesses need payroll financing?

There are a number of reasons why a business may need payroll financing, including:

• Rapid growth
• Increased demand for staff during intense seasons
• Demand fluctuations
• Needing additional staff
• You have a backlog of invoices that have not yet been paid
• You had an unexpected expense that has eaten into the money you needed for payroll

Which industries can benefit from payroll financing?

Payroll financing can be utilized by almost all industries, such as:

• Manufacturing
• Security
• Staffing
• Healthcare
• Oil and gas
• Transportation
• Consultants
• Janitorial
• Providers of business services
• Small businesses and startups
• Retail and wholesale

Types of Payroll Financing Solutions for Small Business

If you are looking to get money for payroll, there are several financing options for you to choose from:

Business loans

If you are looking to use a business loan to get money for payroll, you are likely to want a short-term loan as you are more likely to receive your financing within three days, often just one day.

Short-term business loans allow you to get funding from around $2,500 up to $250,000 with terms ranging from 3 to 18 months. Due to these short terms, interest rates are likely to start at 10%, although this will depend largely on your credit score, how long you have been in business for, and your annual revenue.

Business line of credit

If you think you will need to cover some of your payroll on and off for some time, a business line of credit may be the best choice for you. Most business lines of credit allow you to use the funds over and over, as you pay back in, until your credit line is closed, and you will only have to pay interest on what you spend rather than the total amount.

This type of financing typically provides credit from $10,000 up to $1 million with terms ranging from six months to five years. Interest rates for a business line of credit tend to start at around 7% and you can receive funding in just one day.

Asset-based loans

If you own a business that has particularly valuable assets, or you have valuable personal assets, you have the option of taking out an asset-based loan. This type of financing allows you to gain working capital providing your assets as collateral.

The amount of funding you will be able to secure depends on the monetary value of your assets and the lender that you choose. Just be aware that, should you be unable to pay back your loan, these assets will be seized and liquidated so that the lender can recoup their money.

Invoice factoring and invoice financing

Possibly the most popular form of payroll financing is invoice factoring. This is where you essentially sell your outstanding invoices to an invoice factoring company (IFC) so that you can get an advance on what is owed to you by your customer.

You will be able to get an advance of 80% to 95% of the invoice balance, which is typically sent within one working day so that you can use that money to cover your payroll costs.

Once your customer has paid the outstanding invoice to the invoice factoring company, you will receive the remaining percentage, minus the IFC fees.

Depending on the invoice factoring company you choose to work with, you will be able to qualify for invoice factoring if your outstanding invoices total somewhere between $500 to $5 million.

Rather than an interest rate, this type of funding uses a factor rate of around 3% per week or month, which can increase steadily until the invoice has been paid by your customer.

Another option is invoice financing, which is where you borrow the total of the invoice from a lender and pay it back once your client pays you. The fees for this are usually about the same as invoice factoring fees, but be aware that you will be subject to a credit check. This is a good option, however, if you want to continue working with a client in the future as you retain control over the customer experience they have with you.

Crowdfunding

If you do not want to take the risk of borrowing money, your only option is likely to be crowdfunding. This is a good option if you are a new business owner, but be aware that you’re unlikely to get funding fast enough for payroll. You may need to turn to friends and family instead.