A payroll loan is a short-term business loan used to meet employee salaries, wages, benefits, payroll taxes, and other employee-related expenses. In a scenario where you are not in sync with the payroll schedule, a small business payroll loan covers the financial gaps, and your team gets paid. Generally, the repayment period for these loans is between 2 and 3 years.

How Do Payroll Loans Work?

Apart from managing unexpected drops in sales and cash flow fluctuations, a payroll loan can be used in multiple ways. For example, you may need to hire more staff to support the growth of your brand, but do not have the cash flow to manage the expansion. It helps to overcome cash shortages from delayed invoice payments from clients or customers. 

By using a payroll loan for employee expenses, you can use the existing working capital for other critical business objectives. Besides, payroll loans are not meant strictly for handling employee expenses. Most lenders offer the flexibility to use the funds for other business activities like managing operations and marketing. Moreover, successfully repaying a small payroll loan improves your company’s credit history.

Small Business Payroll Loan Options

Line of Credit

When you routinely require money for payroll management, a line of credit is a flexible financing solution. Unlike a term loan, you don’t pay interest unless you borrow a sum based on the approved limit. This is a faster financial solution for managing short-term monetary needs, without having to reapply for funding each time you run short of cash. However, in exchange for the flexibility and higher risk, you need to pay higher interest rates than standard business loans.

Alternative Lenders like Energize Colorado

We understand the important role that small businesses play in Colorado’s economy and the challenges they face. We offer payroll loans from $5,000 to $150,000 in flexible formats that make it easy to find an option that works for your business. Knowing that all large businesses of today started small, we look beyond credit scores into the character of a small business. One standout feature of our loan programs is their competitive interest rates. Lower rates reduce the overall cost of lending, freeing up cash that you can use to propel growth.

Merchant Cash Advance 

This is a form of business financing that provides you funds against future sales, specifically credit card sales. You will use future sales to pay back the loan plus a fee. There are no standard repayment terms as the repayment is based on your sales volume. Merchant cash advance companies charge a fee based on their assessment of your business. This is a relatively simple way to obtain funds if it is hard for your business to qualify for a traditional bank loan. However, MCAs are not regulated and more expensive than traditional loans.

Should You Consider Employee Payroll Loans?

It is usual for small businesses to go through ups and downs. A temporary cash shortage does not mean you have to run short of funds for payroll. Small business payroll loans have the advantage of having a streamlined approval process that makes the entire funding process quicker. Unlike typical bank loans, a short-term payroll loan does not require minimum capital requirements, or collateral.

Whether your customers are slow to pay or the business is going through a hard time, payroll loans are the perfect solution for temporary cash flow issues. Moreover, they allow you to avoid cost-cutting measures that can have negative consequences for your business in the long run. At the same time, the inflow of cash reduces the chances of your valuable employees seeking alternative employment options.

But remember: Payroll loans are a temporary solution, and relying on them for prolonged periods is not the right choice. Overdependence on payroll loans can trap you in a debt cycle and strain your business’s long-term financial health.