Payroll Loans: How They Work, Top Options, and How to Qualify
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.
What Is a Payroll Loan?
A payroll loan is a type of funding that helps businesses pay their employees. Many forms of financing can be used as payroll loans, including lines of credit and invoice financing, because they fund quickly enough to cover your payroll costs. 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
How Payroll Loans Work
Payroll loans are short-term business loans that provide you with the funding you need to pay your employees in-full and on-time. Because payroll loans require a fast funding time, they’re usually issued by online, alternative lenders.
The way payroll loans work depends on the type of payroll loan you choose. However, payroll loans generally have terms of one year or less, with interest rates that vary. 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.
In terms of repayment, due to the short-term nature of these loans, lenders are more likely to require daily or weekly payments for payroll loans, as opposed to a longer-term monthly repayment schedule.
Rates and Terms of Payroll Loans
The rates and terms of payroll loans will depend on the specific type of loan and the small business lender you work with. Generally, however, you can expect the following ranges:
Best Payroll Loan Options for Small Businesses
If you’re looking for a payroll loan, you need capital fast 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 1 year – Credit score: 550+ – Annual revenue: $100,000+ |
– Time in business: At least 6 months – Annual revenue: $50,000+ |
Ideal Borrower Profile |
– 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.
Business Line of Credit
If 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 for 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 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 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 customers’ history of repayment than your business’s finances and credit score.
You can access invoice financing 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 FundThrough or AltLINE.
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, you generally can expect 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 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.
How to Avoid Payroll Loans in the Future
Payroll loans can be an excellent option if you’re in a bind. However, these loans are expensive and should be your last resort instead of a regular financing option. Emergencies will happen, but doing the following can help you avoid relying on payroll loans.
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 and factor unexpected expenses into your cash flow projections.
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. Consider taking out a loan if your cash-flow projections show that you’ll be able to make repayments and cover payroll moving forward.
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. For example, for every $5 your company makes, put $2 into a business savings account. This way when the time comes that you need extra cash, it’s 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.
Clear conversation might not help you avoid a payroll loan, but it can make employees feel considered and secure in their job. Talking about the issues that led to the shortfall can also make you come up with a plan to address those problems, and ensure they don’t happen again.
Consider presenting your employees 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.
Frequently Asked Questions
The Bottom Line
Ideally, you’ll always have the money to cover payroll. 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 time 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.
