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Small Business Payroll Loans Defined & Explained

Small Business Payroll Loans Defined & Explained
Susan Guillory
Susan GuilloryUpdated August 29, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
It happens. Business is chugging right along — until it isn’t. You might have a slow month or two when you find it difficult to cover business expenses, including payroll. What then? How can you ensure your staff gets paid and business gets back to normal?There are, fortunately, different business loans you can use to cover such expenses at times like these. In fact, there are even specific payroll loans to help.Let’s take a closer look at small business loans meant to cover payroll so you understand your options.

What Are Payroll Loans?

Payroll loans is an umbrella term for any type of short-term business financing that can be used to cover expenses that include payroll for small businesses and payroll-related expenses, like health insurance for your staff. There are many different loan types under this umbrella, including short-term business loans, business lines of credit, invoice factoring, cash advances, as well as working capital loans.Because payroll loans require a fast funding time, they’re often offered by online, alternative lenders. However, you may be able to get a payroll loan through a bank or credit union. Qualification requirements, interest rates, and repayment terms for a payroll loan will vary by the lender and the amount of the loan.

How Payroll Loans Work

The way payroll loans work will depend on the type of payroll loan you choose. Generally, however, these loans fund quickly (sometimes in just a few days) and have a repayment term of one year or less. Because these loans are short-term in nature, you may be required to make weekly, or even daily, payments to the lender. Payments will usually consist of principal and interest, and the repayment schedule will continue until the end of the loan term.

What Can Payroll Loans Be Used For?

Payroll loans can typically be used to cover payroll, payroll taxes, and employee benefits. Before applying for any kind of business loan, however, it can be a good idea to research what you can use that business loan for to make sure you stay within those parameters. Depending on the type of loan you choose, you may also be able to use a payroll loan to cover other business expenses like inventory and office supplies.

4 Types of Payroll Loans

Payroll financing is generally offered via these four types of small business loans.

1. Invoice Factoring

If you have unpaid customer invoices, you may be able to borrow money against those invoices with invoice factoring.With this type of financing, you sell your invoices to a factoring company, which then forwards you up to 85% of their value right away. The factoring company then owns the invoices and gets paid when it collects from your customers. Once the factoring company gets paid, you get the remaining value of those invoices, minus a fee. Keep in mind, though, that invoice factoring can cost more than other forms of business financing.

2. Short-Term Loans

If you need cash fast to pay your small business employees, a short-term business loan could come in handy. These are typically offered by online lenders and, once you get approved, funds can be accessed quickly — sometimes on the same day. However, they have short repayment terms, typically three to 18 months, and interest rates tend to be higher than longer-term small business loans. Recommended: Your Guide to Short-Term Business Loans 

3. Cash Advances

Instead of getting a loan to cover payroll, you may be able to get a cash advance based on the volume of your credit card receipts. With this type of financing, called a merchant cash advance, the funding provider gets paid back by taking a portion of your future credit card sales each day. You can usually get approved quickly (often a day or two) with minimal paperwork. But you’ll likely pay for this convenience in higher interest rates.

4. Lines of Credit

Another option to look at is a business line of credit. Rather than getting all your money at once, you can borrow against a line of credit whenever you need cash. You can borrow a little, pay it back, and then borrow again. Terms will vary by lender, but Interest rates on lines of credit can be lower than credit cards.

Pros and Cons of Payroll Loans

Are small business payroll loans right for you? Let’s weigh the pros and cons.
Pros of Payroll LoansCons of Payroll Loans
Provide fast fundingMay have a short repayment period
Easy to qualify forMay have higher interest rates

Pros of Small Business Payroll Loans

Some payroll loans require minimal paperwork as compared to others like bank loans or SBA loans. That means you may be able to apply and get approved within minutes. Many lenders will deposit funds in your bank account the next business day, so you can get the cash when you need it.Many payroll loans are easier to qualify for than other types of loans, since there are no credit check business loans and other options that look at qualifications other than your credit scores.And finally, if your struggle to pay staff puts you at risk of losing them, having the funds to keep payroll smooth and steady can help you keep those great hires you’ve invested time and money in.

Cons of Small Business Payroll Loans

Depending on the type of loan you get, you may need to repay it within a year or so, which can cut into your profit margins. It can be a good idea to have a plan for how you’ll pay your loan back as part of your monthly budget.Likewise, some loans come with higher interest rates, particularly short term business loans. If you can’t qualify for a bank or an SBA loan, interest rates can rise into the double digits.And finally, while a payroll loan can solve short-term cash crunches, it won’t be able to help if you have bigger financial issues. Consider it a band-aid, not a long-term solution.

Applying for Business Payroll Loans

Once you’ve explored your options for payroll loans, it’s time to choose the one that’s the best fit for you. The better your credit, generally the better the terms you may qualify for. If you have a high credit score, consider a long-term loan from a bank or the Small Business Administration (SBA).If your credit’s less than stellar, there are options, though they may cost more. Look to merchant cash advances, short-term loans, and lines of credit.

Payroll Loan Requirements

Once you’ve landed on the best fit, review the requirements to make sure you meet them. These may include the following:

Business Credit Score

If you have a business credit card and have established a credit history through your business, then your company has a business credit score that is separate from your personal credit score. Generally, the higher your business credit score, the more likely you are to get a business loan from a bank with attractive rates and terms.

Business History

Banks typically want to see that you have been in business for at least two years, since this indicates that you have a successful business model. Online and alternative lenders may have less stringent requirements for length of time in business.

Debt to Equity Ratio

This is the ratio of your existing debt to your business equity. It’s okay if you are carrying some debt, but banks typically like to see a healthy balance between debt and equity. Generally, a debt-to-equity ratio of around 1 or 1.5 is considered good, but this will vary depending on industry.

Business Plan

Banks and other lenders will often want potential borrowers to submit a plan for how they will use the funds from the loan, even if you only plan to use the money for payroll. A business plan shows that you have fully thought through how much you need, how you will use the capital, and how you will pay it back.


With some business loans, you will need to put up an asset to secure the loan, called collateral. The asset could be real estate, equipment, vehicles, or other tangible assets owned by you or your business. If your business cannot repay the loan in full, the lender can seize the collateral to recoup its losses.

What Are Other Small Business Loan Options?

It can be smart to be aware of all your financing options, whether you need to cover payroll or another business expense.

Inventory Financing

If you buy and sell products, you likely spend a large portion of your money on inventory. Did you know that you can use the inventory you’re buying as collateral for a loan to purchase the inventory? Lenders will give you a percentage of the value of your inventory as a loan. Be aware that, should you not be able to pay it back, the lender can take the inventory to cover your debt.

Equipment Loans

Just as inventory financing uses inventory as the collateral, equipment loans use the equipment you’re buying as the collateral for the loan. This often means you can get a low interest rate. Equipment loans can be used to buy computers, heavy machinery, or company vehicles.

Looking for a Small Business Loan?

Business payroll loans are just a drop in the bucket when it comes to your financing options. Don’t wait until you’re strapped for cash to explore getting a small business loan. With Lantern by SoFi, you can see offers from multiple lenders with one click of your mouse!

Frequently Asked Questions

Can SBA loans be used for payroll purposes?
What does it take to qualify for payroll loans?
How exactly do payroll loans work?
Photo credit: iStock/Cameron Prins

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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