Even the best companies struggle with cash flow issues from time to time. A seasonal lull or unpredictable economy can shift business loads, while unexpected expenses may creep up and diminish working capital. However, payroll is one expense you cannot afford to miss and, once those hours are in, you can’t change your forecasts.
At times like these, there are many ways to finance payroll, but most come with a major drawback: debt and interest to be paid. On this page, we’ll go over some of the most common ways businesses get money for payroll, including one that does not result in taking on debt.
Bank loans tend to be the first idea business owners check into. Many financial institutions offer terms ranging from a few months to a few years, which can make budgeting the repayment of the loan a bit easier. However, most require that the business or business owner have good credit, and expect the business to have been in operation for a year or two. Someone with top-notch credit may be able to get a loan with an interest rate under 10 percent, but some can exceed 50 percent or more. If you’re going the loan route, it’s important to examine the interest rate and APR, plus be on the lookout for hidden fees, such as an early payoff charge.
It’s worth noting that there are many loan packages which do not refer to themselves as a loan, but rather, financial products. Read the paperwork for these carefully before signing any paperwork.
2. Lines of Credit
Like credit cards, lines of credit are revolving. As you pay down the balance, you can draw on the account again. This is beneficial if you know you’ll be able to pay off the balance quickly or face the occasional shortage, and you’d like to be able to have funds available on an as-needed basis without having to apply for a new loan each time. With lines of credit, interest rates have the potential to be even lower than loans, though the requirements to qualify are typically greater.
3. Invoice Financing
If you run a business which generates B2B invoices for goods or services, invoice financing could be an option. Getting approval is typically easier than a traditional loan or a line of credit because the invoices serve as your collateral.
The lender learns how much is owed to you, and what your cash flow looks like, then offers you
a percentage of the amount due. This may be done up similar to a traditional loan, in which you receive cash in one lump sum and then make payments. Or it may be more like a line of credit, in which you can draw more as you pay down the balance.
4. Invoice Factoring
Invoice factoring is often confused with invoice financing, but they’re two totally different things. As explained earlier, financing means you’re taking out a loan that you have to pay back with interest. Factoring is the only option here where you’re not creating debt.
You’re actually selling your B2B invoices to a factoring company. It’s one of the easier options to qualify for as well, as the factoring company is more concerned about your customer’s ability to pay— not yours. You also have the option to pick and choose which invoices you factor, and how often you factor, enabling you to tap into it on an as-needed basis.
How invoice factoring works: you tell the factoring company which invoices you want to factor and provide them with details about the company that owes you. The factoring company then does some diligence checks and makes sure the company has the ability to pay its debts. The factor then purchases the invoice from you, gives you cash right away, and then takes on the task of collecting from your clients.
When you work with a factoring company like Interstate Capital, you get a partner that works with you and provides you real-time information, so you’ll always know if you can accept more work from a company with minimal riskYou’ll also have 24/7 access to a robust set of reporting tools, letting you know exactly where you sit at any given time. If factoring sounds like the best method for your business to fund payroll, get an instant online rate quote now.