If your small business needs payroll funding ASAP, a short term business loan or line of credit could be an option. Payroll problems can happen when you need seasonal employees, when you grow faster than your revenues allow, or even because your customers are slow to pay. Because payroll problems vary, payroll financing won’t always be the right solution. If you do decide to borrow to meet payroll, you need to make certain you have the cash flow to make the periodic payments or the financing burden could negatively impact your profitability. In this article we will discuss:
- Where to Get Payroll Funding Fast
- 5 Common Payroll Problems
- 3 Ways to Find Wiggle Room in Your Payroll
- When Payroll Problems Are Actually Cash Flow Problems
Our thanks to OnDeck for sponsoring this article. If you need to a loan answer quickly, OnDeck can get you up to $500,000 in as little as 1 day. Their easy online application only takes a few minutes.
Where to Get Payroll Funding Fast
If your payroll is due and you don’t have the necessary cash in the bank to cover it, you have two main options if you’re consider borrowing:
- Short Term Business Loans – Short term business loans are easier to qualify for than a traditional loan at the bank (provided you can demonstrate a healthy business) and can get funded more quickly than a line of credit. That makes a short term business loan ideal for a small business that needs capital to meet a short-term business need quickly.
- Small Business Lines of Credit – Small business lines of credit can be a good option for those businesses who have a recurring short-term borrowing needs and can also be used to cover an occasional payroll need too. However, lines of credit are generally harder to qualify for than a term loan and may take longer to fund.
There are many traditional lenders who offer term loans and lines of credit to small businesses. However, they often have high minimum requirements, hefty application processes, and can take a long time to fund your loan. If you need to borrow to meet a short-term business need (including meeting a payroll gap, an online lender can be a good choice.
Here’s an overview of OnDeck’s short term loan and line of credit products.
OnDeck Short Term Loan vs Business Line of Credit at a Glance
|Short Term Loan||Line of Credit|
|Time For Approval||1 Day||1 Day|
|Time to Receive Funds||1-3 Business Days||2-3 Business Days|
|Loan Amounts||$5,000 - $500,000||Up to $100,000|
|Payback Time Period||3 Months - 3 Years||6 Months|
|APR Range||30% - 50%||13.99% - 39.9%|
|Annual Gross Revenue||$75,000+||$75,000+|
|Time in Business||9+ Months||9+ Months|
|Visit www.OnDeck.com||Visit www.OnDeck.com|
When borrowing to meet an immediate payroll shortfall, you want to make sure your total cost of capital (the amount you’re paying for the borrowed money) is affordable. High interest rates aren’t the only thing that can make a loan expensive. Repayment terms can also add to the costs of a loan.
“If you are borrowing to meet payroll, I would borrow with the shortest term possible,” said Ty Kiisel, Editor at OnDeck. “And make sure you’re able to make the periodic payments before you commit.” Whether you decide to meet your payroll funding with a short term small business loan or with a small business line of credit, borrowing to meet payroll should not become a regular occurrence. In the next section, we’ll take a look at ways you can eliminate payroll problems without borrowing.
5 Common Payroll Problems Solved Without Borrowing
“There are a lot of moving parts to running a successful small business. Questioning an otherwise healthy business’ profitability because they occasionally struggle to make payroll is an oversimplification,” said Ty Kiisel, Editor at OnDeck. “It’s not uncommon for seasonal cash flow issues to throw a wrench in the works or for other unexpected cash flow issues to create a bump in the road.”
Five common payroll problems you can solve without borrowing are:
- Hiring Outpaces Revenues
- Need Seasonal Workers or Temporary Workers
- Slow Paying Customers
- Miscalculating Payroll Taxes
1. Hiring Outpaces Revenues
When your business starts to do well you can feel pressure to maintain that growth by hiring more staff. Many times a business owner will put the cart before the horse and expand their payroll or other expenses quicker than their revenue can keep up. A business owner might anticipate increased revenue because their new hires will let them take on more jobs, but that revenue might take a while to materialize.
You need to anticipate the fact that it could take awhile for revenues to catch up. If you are wanting to grow your payroll faster than you receive revenue you need to have the cash available to float the increased payroll expenses. If you do not have the cash savings to cover the increase in payroll, you’ll want to make sure you have a financing option available to you. Otherwise your business runs the risk of growing to death.
2. Need Seasonal or Temporary Workers
If you see a majority of your business during a particular season then your payroll expenses are also likely to increase during that time. This is common for landscapers, restaurants in resort towns, and businesses in college and university communities. This process is cyclical and predictable. You should know when to expect extra payroll expenses.
Since you know that your employee expenses will increase before your revenue does you should prepare in advance by having funds available. You’ll either need to set money aside from the last season to afford the first round or two of payroll expenses or you’ll need to obtain an affordable financing option.
Small business owners have many jobs to juggle at once. It can leave you with very little time to think about and research finding efficiencies. Occasionally, small businesses owners fall into the bad habit of simply throwing another body at problems or tasks as they arise. If business slows, this can create a huge payroll funding problem.
“It can seem easier to increase your headcount than to solve an underlying problem” said Bryan Clayton, CEO of GreenPal. “Hiring a new employee should be the last case scenario for every small business. Before taking on another team member explore other options such as reorganizing shifts, outsourcing contractors, repurposing current staff, or find ways to automate mundane tasks.”
4. Slow Paying Customers
Customers do not always pay your invoices in a timely manner. If your budget is tight, and you rely on your customer receivables to cover your own regular monthly expenses, then a slow paying customer or two could damage your ability to make ends meet. While a small business line of credit can serve as a backstop for slow paying customers, there are also way to encourage your clients to pay you more quickly.
First, you need to make sure you’re using a modern, efficient invoicing software so that your customers receive their invoices like clockwork. Second, offering a discount for paying invoices early can turn slow paying customers into timely customers. If you have a few clients that are still paying your invoices too slowly, you can consider invoice factoring for those particular clients..
5. Miscalculating Payroll Taxes
If you make a mistake calculating your payroll taxes, the IRS is going to send you notice that you owe them money. Unfortunately this notice will come much later than when you missed the payment. You may have been making that same mistake for quite a while and be stuck with a large, unexpected bill. But there are ways to limit this IRS bill’s impact on your ability to continue to make payroll.
“There are a number of ways a business can work with the IRS to settle outstanding payroll tax liabilities” according to T. Joshua Wu, Partner at Greaves Wu. “These range from installment agreements to offers in compromise to currently not collectable. Installment agreements allow taxpayers to enter into a payment plan to settle outstanding payroll taxes. These are typically done in equal monthly installments. With an offer in compromise the taxpayer can ask the IRS to settle payroll taxes for less than the full amount.”
3 Ways to Find Wiggle Room in Your Payroll
If you’re consistently running into a payroll shortfall, there’s a good chance you need to review your payroll schedule. Here are three steps to review your payroll:
Step 1: When do you actually need payroll funds available?
If you’re consistently running into payroll problems, finding a solution to the problem can be easier if you start be working backwards. The first thing you should ask yourself is when you actually need the payroll funds available in your account. The answer might not be as obvious as you think.
For example, many small businesses utilize the services of a payroll company. While a payroll company can relieve you of a lot of administrative burdens, it can also mean you need funds available for payroll 3-4 days prior to the actual payday. On the other hand, if you’re not using a payroll company, you won’t need the funds available to you until payday. So, depending on the size and complexity of your payroll needs, it might be worth the added administrative work to gain a little more flexibility.
Step 2: Direct Deposit vs Physical Checks
The primary reason small businesses pay their employees via direct deposit is the convenience to the employee and reduced administrative tasks for the small business owner. For many small business, speed and convenience are the biggest concerns. But if you’re regularly facing uncertainty about being able to make payroll on time, there may be some benefits to physical check.
Shifting to a physical check system has the ability to create a little wiggle room for you as an employer. While you can’t rely on it 100%, clear the check may create another day before funds are actually withdrawn from your account. Additionally, some employees may not deposit your check right away. Keep in mind, with the ability to deposit checks at ATM or via their smartphone, the wiggle room created by a paper check is much less than it used to be.
Step 3: Can you delay paying other expenses?
Being late on your payroll will create significant problems between you and your employees. Untimely payroll can not only create temporary inconveniences for employees (which can usually be rectified) but also long term issues of trust and employee satisfaction which be much more difficult to resolve.
For that reason, consider what other bills you might be able to put off before missing payroll. While your vendors, suppliers, utilities, and landlord certainly will not be thrilled to receive a payment late, it’s also unlikely to create lasting damage to the relationship, especially if it’s not a common occurrence.
The last expense to consider is owner’s salary. If you must send a paycheck out late, yours is the one that create the fewest problems in the end. Not only that, you can also customize how you pay yourself if irregular revenue creates certain times of the month or year that make payroll harder to meet.
If after reviewing your payroll schedule, you’re still not able to make payroll work, you may have a larger cash flow problem.
Are Your Payroll Problems Really Cash Flow Problems?
“No small business owner wants to reign in growth, but sometimes unexpected costs of growth can exacerbate cash flow issues and make payroll problematic,” said Ty Kiisel. “As a business owner, I personally experienced the cash flow challenges associated with slow-paying customers when I had already committed to meeting other important obligations. That’s why it’s so important to always be aware of your current cash flow and try to anticipate those times that could be challenging.”
If your small business is finding that it’s having trouble not only meeting payroll, but also meeting other regular expenses, it might point to a larger cash flow problem. As Ty points out, cash flow problems don’t always mean your business isn’t successful. But those problems will need to be addressed if the business is going to be able to grow. Read our article on solutions to cash flow problems for more information.
While there are other options to help you with payroll problems, if you need help fast a short term loan or line of credit could be a reasonable solution. A short term loan could be a good solution if you need up to a large amount (up to $500,000) of capital, or if you view your payroll shortage as a one time thing. If you regularly experience the need to access short-term borrowed capital, you might want to consider taking out a business line of credit to have funds available when you need them.
OnDeck offers both a short term loan and a business line of credit. Either one can help you meet your payroll demands quickly. To apply you can fill out a 100% online application and often get approved within 1 day. Once approved you can be funded in 2-3 days. You can qualify for up to $500,000 with a short term loan or $100,000 with a business line of credit. Visit them today to see how much you qualify for.