Best Payroll Loans for Small Business

05 May, 2016 / Comments: Comments Off on Best Payroll Loans for Small Business / By

When considering a payroll loan, it’s crucial that you understand the various options that you have available to you to fund your small business. A payroll loan is a short-term, small loan that is unsecured. Here is an overview of the different kinds of payroll loans that you should consider when you are in need of working capital.


SBA Guaranteed Loan

The term “SBA” often leads small business owners to be confused, as the Small Business Administration is not actually the one that lends out money. Instead, they set guidelines to be followed by its lending partners for this type of loan. These partners guarantee a part of the loan will be repaid, even if the small business owner is unable to. Taking out an SBA loan makes lenders more willing to work with you, which can be a great option, especially if your business is just getting on its feet. The majority of SBA guaranteed loans mandate that you provide financial statements, as well as have a good credit rating. Many types of loans can fall under the SBA loan category, including payroll loans.


Short-Term Payroll Loan

If you need capital to cover for a temporary lack of cash flow, then a short-term payroll loan is available to you for a broad range of purposes. This includes giving you capital to cover inventory, payroll, as well as refinancing your already outstanding debts or taxes. This kind of loan is similar to a traditional bank loan in that you borrow a certain amount of money and must repay it. Be aware that this type of loan usually comes with a higher interest rate and shorter repayment period than traditional business loans with longer terms.


Invoice Financing

If your small business is B2B and has stable accounts receivable, then you may want to look into invoice financing, otherwise known as accounts receivable financing as it is a quick means of obtaining working capital. With this type of payroll loan, you will receive an advance of a certain percentage of your accounts receivable’s value. Typically, this percentage is in the range of 80 percent. Once you collect your receivables, the lender will pay you the remainder minus its fees. One of the benefits of invoice financing is that it doesn’t require a credit check or that you put up any collateral. However, it does have higher fees than that of a traditional business loan.


Merchant Cash Advance

If your customers often pay you with credit, then you may benefit from a merchant cash advance. This kind of loan does not have very much paperwork associated with it, and you can be approved and receive funding in 24 hours. The merchant cash advance lender will give you an advance on your expected credit card sales. To repay the advance, you give the lender a portion of your credit card sales every day, as well as an added fee. If you’re considering this option, then keep in mind that merchant cash advances tend to have a high APR and so ensure that taking one out is worth it.


Business Credit Card Cash Advance

Credit card cash advances have a separate balance from the purchases you make on the card, as well as an additional interest rate. However, when you make a payment, it may be applied to both the advance and your normal balance. Keep in mind that if you use this option and only make the minimum payment on your card, the credit card company can apply your minimum payment to the balance that has the lowest interest rate, which will cause the cash advance to remain outstanding and increase due to the high fees and interest rates. The fees and interest rates of cash advances vary widely between different credit card companies, and so before you go with the option, it’s best to do your homework and know all the features of your credit card before taking money out through a cash advance.

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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