How to use payroll loans for small businesses

Businesses run on their people, so paying your team on time is a must. However, they also represent a significant fixed cost which businesses with an inconsistent cash flow can struggle to always meet. That’s where payroll loans come in, providing quick access to capital to meet your salary bills when it counts. 

 A short term loan for payroll can help businesses maintain their operations, hire new staff to generate revenue and keep employees happy when available capital falls short.

Here we’ll look at how payroll loans work, why businesses use them and how to get the most out of financing for payroll. 

What is a payroll loan? 

Payroll loans are a type of financing specifically designed to help businesses cover payroll expenses when there isn’t enough cash available. 

There can be a range of reasons why you might struggle to meet payroll in some months, including seasonality, delayed payments or unexpected expenses. Employee costs can also be a long term investment, where businesses build up their team in advance of a busy period, but haven’t yet reaped the revenue to meet their new, higher wage bill.

In these scenarios, a payroll loan can ensure continuity for your employees and maintain your momentum, providing time for your revenue to catch up. Given the urgency of meeting payroll, businesses often look for payroll loans online from alternative lenders, due to the increased speed and convenience of their service.

How do payroll loans work? 

Payroll loans function like any other business loan, with the key difference being their specific use for payroll expenses. 

After approval, the funds are deposited into the business's bank account, and the business can then use the money to pay employees. Repayments are made according to the loan agreement, which may include daily, weekly, or monthly payments.

These loans can be secured or unsecured loans, depending on the needs of your business at that moment.

Can business loans be used for payroll? 

Yes, flexible small business loans can be used for a range of business purposes, including payroll. Since your team is a key part of generating revenue, investing in your team by keeping payroll consistent is also a way to ensure you can repay the loan promptly. 

Payroll isn’t just a matter of wages – it can include a range of other costs, all of which can be covered by a loan, including:

• Commissions and bonuses
• Paid time off and other benefits
• National Insurance contributions
• Local and national taxes
• Statutory Sick Pay (SSP) and Statutory Maternity/Paternity Pay (SMP/SPP)

When should a business use employee payroll loans? 

While useful, payroll loans are not a substitute for proper cash flow management that aligns your costs with your available capital. If you’re using them on a regular basis, it may be a sign that your team isn't producing enough revenue to justify its costs. However, there are certain scenarios where a payroll loan can be a prudent investment, including:

• Covering upfront expenses when growing your team in advance of a busy period or project.
• Managing costs when growing your business aggressively with new hires to generate revenue.
• Covering cash flow gaps when you’re facing unexpected expenses or going through a slow period due to seasonality .

Whenever you consider using a payroll loan, you should ensure you’re going to be able to cover the future expenses of repaying the principal and interest.

Types of payroll loan

1. Short-Term Business Loans

Short-term loans provide quick access to cash with repayment terms typically ranging from three months to a year. These loans are ideal for businesses needing immediate funds to cover payroll until cash flow improves.

2. Business Lines of Credit

A business line of credit offers flexible access to funds, allowing businesses to draw money as needed up to a predetermined limit. Interest is only paid on the amount borrowed, making it a cost-effective option for managing, say, a portion of payroll and other recurring expenses.

3. Invoice Finance

Invoice finance or factoring involves selling outstanding invoices to a factoring company in exchange for immediate cash. This can be particularly useful for businesses with long accounts receivable cycles – ie when you’re waiting for invoices to be paid so you can pay your employees. Invoice finance brings that payment forward and passes the responsibility for collections to the factoring company.

4. Merchant Cash Advances

Merchant cash advances provide a lump sum of cash in exchange for a percentage of future sales. This type of financing is suitable for businesses with steady credit card sales and can be used to cover payroll during slow periods.

Advantages and disadvantages of payroll loans

Payroll loans can be a handy solution to short term cash flow issues, but they can also put extra financial pressure on your business. 

Advantages include:

• Maintaining business continuity: If you’re going through a temporary cash crunch, a payroll loan can give you the capital to keep your team on and put you in a position to recover faster than if you had to shrink headcount.
• Keeping employees happy: Ensuring employees are paid on time helps maintain morale and productivity. It also prevents potential turnover due to unpaid wages.
• Flexibility: Different types of payroll loans offer flexibility in terms of repayment and access to funds, allowing businesses to choose the best option for their specific needs.
• Quick access: Many payroll loan options, especially those from online lenders such as iwoca, offer quick approval and funding, sometimes within 24 hours. 

Potential drawbacks include

• Extra debt: Taking out a payroll loan adds to your business's debt load. If you’re already struggling to meet your costs, adding extra financial burdens can be a risky move.
• Higher fees and interests: Depending on the term, payroll loans can come with high-interest rates and fees, especially short-term loans and merchant cash advances.
• Credit risk: Failure to repay a payroll loan on time can negatively impact your business's credit score, making it harder to secure future financing.

Secure a payroll loan in less than 24 hours

If you need fast access to capital to cover payroll expenses, an iwoca flexi-loan can help you ensure your employees are paid on time.

With our easy application, you can borrow up to £500,000 to give your business the cash flow boost it needs to cover essential expenses and pay it back on your terms.

• Apply in minutes and get approved within 24 hours
• Borrow funds from 1 day to 2 years and repay any time, with no penalties
• No collateral required