One of the most important resources you have as a small business owner is your employees, and therefore, one of the most important expenses you have is your ability to meet payroll. What happens, however, when your business hits a slow period or your cash flow is uneven? You don’t want to find yourself in a position in which you can’t afford to pay your employees – this could cause many of them to quit at once and harm your business’ reputation or keep the business from functioning at all.

There are various financing options available to you to help keep your payroll going during periods when your cash flow is tight or customers are slow to pay their invoices.

Fortunately, there are various financing options available to you to help keep your payroll going during periods when your cash flow is tight or customers are slow to pay their invoices.  These options can assist you in meeting salaries, payroll taxes, commissions, and bonuses until your business is in a position to meet its obligations.

Should Financing be Used to Meet Payroll?

At first, taking out a loan or other type of business financing product to meet your payroll may not seem like a good idea, but there are plenty of situations in which doing so will help your business stay on its feet and even help it grow. Here are some scenarios in which using financing is something to consider:

1. Long-term growth plans. If you are seeking to execute a long-term growth plan and need to hire additional staff as part of that plan, you probably don’t have the immediate funds to pay new employees. Financing most likely would come in handy so you can move your business forward without having to worry about how you’re going to pay your workers.
2. Handling large orders or contracts. When your business suddenly wins a large contract or receives a large order, you may need financing to quickly hire additional staff so that you can fulfill the obligations that came with the new order.
3. Seasonal needs. Many businesses make the bulk of their revenue during certain times of the year. For example, a retail shop may make most of its sales during the holiday season. In this case, financing could be used as a convenient way to maintain payroll during slower periods.
4. When customers are slow to pay. Sometimes customers can be slow to pay their invoices, but you still need cash on hand to pay your employees. Short-term financing can conveniently fill the gap between the time you need to meet payroll and the time the customer finally pays up. 

Sometimes Financing isn’t the Best Option

While financing can be an easy option to cover your payroll, it isn’t an ideal choice in all situations. If you find you can’t meet payroll because your business is struggling, then taking on additional debt to meet it probably isn’t such a good idea as it will only exacerbate the problems your business is facing. 

If your business is struggling to the point in which you can’t meet your payroll, financing will only add to your problems. Your best bet in that situation is to assess why your business is struggling and cut expenses wherever possible. This may even involve the painful step of cutting some of your staff. 

What Types of Payroll Financing Are Available?

There isn’t one specific loan product dedicated to meeting payroll, but there are several convenient financing options available to small business owners who need quick funds to cover their payroll obligations. Some of the most popular of these options with small business owners  include: 

Term Loan 

A term loan is a lump sum of cash that is paid back over time with interest – essentially, it’s a traditional business loan. This is a great option if you are looking to implement long-term growth plans and need to hire new employees. A term loan typically offers a lower interest rate than other types of financing, and the duration of the payback period can, in most cases, be pre-negotiated. 

The potential drawback of considering term loans to cover payroll is that they are the most difficult type of financing to obtain – they often require a good- to excellent credit score, and if you’re applying for one through a traditional bank, you will often face a lengthy, paperwork-heavy application process.  

Business Line of Credit

A business line of credit gives you access to a predetermined amount of revolving credit and is a flexible financing tool if your business is seasonal and you need cash to pay your employees during the slow periods of the year. You are only charged interest on the amount you use, and you don’t have to borrow the full amount when you draw on it.

The potential drawbacks of using a line of credit for payroll is that it typically comes with a higher interest rate than a term loan, and some lenders may require tight repayment terms when compared to a term loan. In many cases, you will likely have to renew the line of credit once at least once a year. Both traditional and alternative lenders offer business lines of credit.

Working Capital Loan 

A working capital loan is a short-term loan from a reputable alternative lender that can be used if you’re facing an unexpected cash crunch and need quick funds to meet your payroll. If your business suffered a slower-than-expected month or quarter or had to deal with an unexpected expense, working capital loans typically have less restrictive requirements than a term loan or line of credit, and the payback period is often 6 months or less. 

The potential drawback of using a working capital loan for payroll financing is that it comes with high interest rates when compared to a bank loan or line of credit.

Invoice Factoring 

With invoice factoring, small business owners can receive cash upfront from an alternative lender for their unpaid invoices in exchange for a factoring fee, meaning that the lender gets to keep a small percentage of the invoices when they get paid in full. This is a good option for small business owners who are facing a cash crunch due to slow or late invoice payments and will enable them to meet expenses – such as payroll – while waiting for customers to pay. What may make this option even more attractive is that borrowers are not held to the same lending requirements as they would be with a typical bank loan, and they can get the funding they need quickly.  

The potential drawback of invoice factoring for covering payroll is that it is usually significantly more expensive than a bank loan or a line of credit. Additionally, some lenders might want long factoring contracts, so carefully consider the terms of any deal you have on the table before signing on the dotted line.. 

Revenue-Based Financing

In a revenue-based financing deal, small business owners sell a portion of their future sales at a discounted rate in exchange for a lump sum of cash upfront. This can be a good option for small business owners that have a strong sales history, but who are facing a cash crunch due to an unforeseen expense or other extenuating circumstance that is keeping them from meet their payroll deadline. 

The potential drawbacks of such a revenue-based financing arrangement for payroll is that, like invoice factoring, it can be significantly more expensive than a term loan and, in most cases, you will give up a percentage of your daily sales until you have met your obligation to the financing company. 

Before considering any of these financing options, small business owners should carefully consider why they are currently unable to meet payroll.  This will help in selecting the best financing type and borrowing terms for their situation. 

Obtain Financing Before it’s too Late

As a small business owner, your payroll is one of your most important expenses. If you find yourself in a position to have to borrow money to meet your payroll, it’s important to plan to prevent a situation in which your employees are not getting their paychecks. Not paying them may not only cause them to quit, but it can also hurt your business’ reputation among future potential employees and customers. This can be especially harmful if your business operates in a tight-knit community because word can travel fast that you don’t pay your employees.  

If you have to use financing to cover your payroll, carefully evaluate all of your options and choose the financing that best suits your business and its current situation. This includes choosing the payback option that you’re most comfortable with and the fees and interest rates you’re willing to pay.