What is Payroll Financing?
Payroll is the most essential part of business for both the employer and the employees; for all employers, payroll is just as important as positive sales and great customer services. A business owner cannot expect their employees to provide great customer service to help boost sales without some form of incentive, so making sure that your business, no matter the industry, can cover payroll costs every single pay period is a priority. As a business owner, if you are ever late with paychecks or make incorrect classifications when handing out paychecks, your employees can become dissatisfied, leading to an unmotivated workforce. Basically, you cannot retain people when payroll is late, wrong, or even worse – never paid. The latter can lead to many expensive legal ramifications as well, which is why staying on top of your payroll for your employees is crucial – no business owner wants to meet those federal and state government enforcers.
Payroll affects every single aspect of large and small businesses alike. Employees must be able to rely on an employer to pay them consistently and without delays, however payroll can also affect the financial stability of your company. Payroll is actually one of the oldest commercial computer applications in the world. General Electric Company bought the first computer sold to a private company in 1954; this computer was known as UNIVAC I. After purchasing this computer, General Electric programmed it to run their payroll! For all of you technologically savvy people out there today, I am sure this type of outdated system running payroll sounds ridiculous, but it has set the way for all of the advanced payroll programming systems out there, as well as the needed access to outside information to use it effectively.
The relationship between an employee and employer is highly regulated through different state and federal requirements, which in turn can lead to many employers, especially new business owners or small business owners, making mistakes on paychecks. There are literally hundreds of different rules and regulations associated with payroll, which is why about one in three businesses is penalized by the Internal Revenue Service for payroll tax mistakes. Unfortunately, understanding how payroll works and the intricacies involved with the tedious process can cause confusion – and many headaches – for business owners. Many business consultants recommend that business owners consider using outside resources, whether it be a payroll service or accountant, for help. Using outside sources for a small business’ payroll needs not only saves time for business owners who have many other obligations and responsibilities to worry about, but sourcing the payroll aspect of a business to another company who is well educated in these regulations can help prevent any issues of breaking mandatory state and federal laws. While this seems like a great option for any merchant, startup, small, or large company, hiring other businesses to help with payroll can be expensive when you have an already tight budget, so reviewing the different lending possibilities available to your business can help.
Many reputable business owners believe that when a startup business or small business has successes, it is because of the people you employ, which means that those employees deserve every single cent they rightfully earn. Unfortunately, even the best business owners face difficult times. Research shows that 43,546 small businesses filed for bankruptcy protection in 2008. In conjunction with these numbers, only half of new small businesses survive beyond their fifth anniversary. So as a business owner, if your employees are the bread and butter to your company, but the company has had some financial difficulties, how do you pay those employees you cherish so much without letting your business go under? There are many different options out there for struggling business owners that can start right in your own company:
- Talk to and notify your employees first and foremost. More often than not, business owners know if they will be unable to make payroll for that pay period. Unfortunately, many business owners experience embarrassment or pride when lacking the ability to pay employees, but you would be surprised to see who would be willing to stick around during these difficult times. If some employees are not, or cannot, willing to wait it out, then giving them ample time to search for a new job is simply the right thing to do.
- Utilizing available resources is also a viable option for business owners who cannot cover payroll costs. If your business has outstanding receivables or liquidation on existing inventory, then discounting these in exchange for payment immediately can be an option. Of course, there are always draw backs, but prioritizing payroll over future income is always the right decision.
- Sacrifice: If your small or large business is structured in a way that you have higher up employees that have some sort of equity, discussing with them the option of temporarily sacrificing their paychecks to cover the costs of the lower entry level employees is always a possibility.
Payroll Financing Options
All of these suggestions are creative ways to deal with meeting payroll demands, however every business owner needs to understand all the payroll funding lenders, including traditional bank payroll lenders, SBA payroll lenders, alternative payroll lenders, asset based lenders, merchant cash advance payroll funding companies, and so many other viable lending options. There are many factors for business owners that can determine the need for a loan option, such as slow paying clients, rapid growth periods, unsteady cash flow, and seasonal patterns. As a business owner, paying attention to industry trends in general along with seasonal patterns in the past can help. If you know your busiest season is during the holidays, generally your business sees a decline during the months following the holidays. If you know your businesses general patterns and can foresee the need of having different finance options, utilizing traditional bank loans and SBA loans are essential since the process takes much longer than other loan possibilities. However, if your business has taken a sudden hit because of the economy, a changing industry trend, or even late client payments, then making sure to review other loan or cash advances can come in handy.
Types of Payroll Loans
|Bank||6-10%||3-7 years||14-30 days|
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
Bank Payroll Loans
If you can obtain them, a bank loan is the healthiest and most affordable form of business financing. But with fantastic rates and extended terms comes more review and requirements from the bank. Therefore, in order to qualify for bank-rate financing, the borrower will need excellent credit and good business revenue.
- Rates: 4-10%
- Terms: 1-5 years
SBA Payroll Loans
SBA loans are a good form of payroll funding, using the SBA Express loan program. The SBA express offers bank-rate financing with an SBA guarantee, but with a superfast turnaround (SBA can make a decision within 36 hours)
- Rates: 6%
- Terms: 3-7 years
Alternative Payroll Loans
Quickly becoming a more common choice for payroll funding, a mid-prime alternative loan offers small businesses affordable financing options, without the hassles seen with a bank loan. Alternative payroll loans can fund in the matter of days — not months — and require minimal documentation to qualify and fund.
- Rates: 9-16%
- Terms: 1-5 years
Cash Advance Payroll Funding
For company’s that have immediate payroll needs, lack proper documentation for more traditional forms of business financing, or have bad credit, a good choice could be to obtain a merchant or business cash advance. An advanced is the sale of the company’s future bank or credit card deposits in exchange for immediate financing. Cash advances are popular among small businesses for payroll funding because they can fund within a day.
- Rates: 16-100%
- Terms: 4 months – 2 years