One of the toughest problems that a business owner can face is not having enough money to make payroll. This scenario can create a lot of stress for the owner because it is not an easy problem to solve. As an entrepreneur, you feel responsible for your employees. They are your most important resource, and it’s your responsibility to pay them on time – every time.
In this article, we discuss eight options that can be used to finance your payroll. We suggest that you start looking for payroll funding a month or two ahead of when you will need the money. If that is not possible, at least try to give yourself a couple of weeks to put the funding together. Obviously, the more time you have to get funding, the better. The eight options we cover are:
- Personal assets
- Line of credit
- Invoice factoring
- Ledgered line of credit
- Peer-to peer-lending
- ACH/merchant cash advances (warning)
- Friends and family (warning)
Why can’t you meet payroll?
Before you start looking for funding, determine why your company is unable to meet payroll. Funding won’t help you unless you know the root cause of the problem and have a strategy to solve it. Sure, getting funded may help you cover payroll this time, but what about the next time? And the time after that?
Meet with a CPA or financial adviser to review your situation in detail so you can fix the problem once and for all. This step may not be easy, but it is the right path forward.
The following eight alternatives can be used to finance the payroll of your company. Review the list and select the ones that fit the best. Keep in mind that every solution may not be applicable to your situation.
One quick disclaimer – we included the last two options (#7 and #8) so that the list would be thorough. We do not necessarily recommend them.
#1 Your personal assets
In most cases, you are your own best source of funding. If you have personal assets that can be leveraged, consider investing them in the business. Ideally, these assets should be things that can be turned into cash fairly quickly, such as savings accounts, certificates of deposit, the proceeds of stock sales, and so on.
You can put money into the business by making a capital contribution or lending the money to the company. Once the funds are in the company’s bank account, you can use them to meet your payroll liabilities and move forward.
#2 Line of credit
Obviously, if you have a business line of credit, you could draw from it to meet payroll obligations. If you don’t have a line of credit, getting one to meet a cash flow emergency is very difficult. The underwriting process can take several weeks or longer. To qualify for a line of credit, your company must have two years’ worth of positive trading history and assets. Lastly, most lenders check your personal credit and assets as part of their review process. If you have bad credit, chances are that you won’t qualify for a line.
#3 Invoice factoring / accounts receivable factoring
Invoice factoring can be a great solution if your company works with commercial or government clients. Specifically, factoring can help you if you are unable to meet payroll because your money is tied to slow-paying invoices.
Invoice factoring allows you to turn your invoices into immediate funds, which you can then use to meet your payroll obligations. When used regularly, factoring can streamline your cash flow to help ensure you can meet your obligations.
This service is provided by factoring companies, and qualifying for it is relatively easy. It’s available to staffing agencies, manufacturing companies, service providers, and any business with commercial/government clients. Learn more about factoring.
#4 Ledgered line of credit
A ledgered line of credit (also called sales ledger financing) is a solution that helps midsize companies with cash flow problems. It operates much like a line of credit secured by accounts receivable. The solution is more flexible than factoring. It is intended for companies whose revenues are above $300,000 per month and that have a well-established accounts receivable management department.
#5 SBA Microloans
If your company needs less than $50,000, an SBA Microloan can be a great alternative. These loans are provided by SBA partners that specialize in working with small businesses. Microloans don’t have many of the requirements that conventional loans have. They are also available to companies that have a limited trading history. The best feature of these loans – aside from the money – is that they come bundled with business consulting services from the SBA. This service can help ensure you never run into payroll problems again.
#6 Peer-to-peer lending
The peer-to-peer (P2P) lending option has been gaining popularity in recent years. You can get it through one of the P2P platforms, such as Prosper or Lending Club. Using P2P is fairly simple. You post your loan request and requirements and information on the P2P platform, where individuals (called “investors”) have a chance to finance all or part of the loan. Success is not guaranteed, though. Loans are often limited to $35,000, and your personal credit is important because most platforms do not lend to businesses – they lend to individuals. But as an individual (business owner), you can then put the money into the business. Learn more here.
#7 ACH loans / merchant cash advances
ACH loans and merchant cash advances are products that allow you to borrow against future cash flow, though some argue that you are actually selling future cash flow. These loans are made to companies that don’t meet regular underwriting criteria. They can usually be underwritten in a day or two, which means that they can be used for payroll emergencies.
However, there is a serious problem with these loans – they are very expensive. More importantly, they can backfire if used incorrectly. Work out all the financial details, including how you will repay the loan, before you get the loan. Here is a detailed explanation of how these loans work and the pros and cons of this solution.
#8 Friends and Family
This option should be your absolute last resort because getting a loan from friends and family often comes with an important caveat. If you are unable to repay the loan, you could jeopardize that relationship forever.
If, after careful consideration, you still choose this option, consider the following suggestions. Disclose all the relevant details to your friends and family lenders. Be upfront about everything – including the risk of not being able to pay them back. Keep them informed of the progress along the way. Put the agreement in writing and do your best to honor your commitments.
Do you need payroll funding?
We are a leading factoring company and provide payroll funding to companies that need to finance slow-paying invoices. For more information, get a quote or call us toll-free at (877) 300 3258.