Small business cash flow can be tricky. Whether you’re dealing with rapid growth or changing economic conditions, it can be hard to manage your inflows and outflows. A particularly sticky situation can arise if you are unable to meet payroll.
Being unable to meet payroll can be embarrassing and cause concern among your employees. Payroll financing can help you to alleviate these issues. Your small business can have access to funds if you are short on cash.
Below are some facts about payroll financing and why it makes sense for small businesses.
1. Payroll Financing Is Easier to Get Than a Business Loan
Applying for a business loan can take time. Conventional loans are typically only one-time and have extensive underwriting requirements. These loans also may not meet your ongoing needs for payroll.
Companies that specialize in payroll financing, you will typically have quick approval and funding. They understand that payroll is critical to a small business.
2. Financing Line Increases as the Business Grows
Staffing can be tricky for a small business. On the one hand, you don’t want to over-staff and have more costs than you are able to bring in business. On the other hand, you need enough staff to scale and respond to your customers.
Payroll financing lines can increase as your business expands. This allows you to be responsive and hire new staff as you have more demand.
3. Steady Access to Funds for Seasonal Businesses
Another cash flow problem that small businesses often face is seasonal operations. There may be some months of the year with a lot of activity and other months that are slow. This can make payroll tricky when staff needs to be retained year-round.
Payroll financing can solve this issue. By accessing the funds only when needed, you can cover the slow months without any problems.
4. Allows Time for Invoices to Be Paid
Often, businesses invoice their clients on a net-30 payment term, meaning that the invoice is due within 30 days. Clients that are slow to pay can cause cash flow issues.
Payroll financing alleviates these problems and even allows you to offer additional payment terms to your clients. For example, you could offer net-60, knowing that payroll will not be an issue.
5. Secured by Accounts Receivable
Payroll financing is usually secured by your accounts receivable. This means that your unpaid invoices are the collateral for the loan.
This works by selling your invoices to a lender or invoice factoring company. In turn, either will advance you the funds you need for payroll, up to a certain percentage of the invoices. Then the lender or company will collect the unpaid balances from the invoices as repayment.
Avoid a Payroll Emergency
No business wants to find themselves in a situation where they cannot make payroll. It is better to apply for payroll financing before you need it so that you know you will have access to the funds. You can use payroll financing to cover wages, salaries, and taxes.