Missing payroll is a major problem for a small business owner. Paying employees late can create panic among the staff and may even have legal consequences. Even when business is good, small businesses may be short on working capital at payroll processing time.

You have to run payroll on time but when payroll costs outstrip your working capital, it’s time to explore payroll loans. The best payroll for small business ensures on-time processing and cash flow that meets all business obligations. For a business owner, payroll financing can come from a short-term loan, a cash advance, a line of credit or invoice factoring. All of these options provide working capital quickly enough to cover the cost of payroll.

In this article:

• The best payroll for small business options is when working capital is tight.
• How to get a payroll loan for a small business.
• How payroll software can streamline operations and payroll costs.

What Are Payroll Loans?

Payroll protection loans are a type of funding that small businesses can use to pay their employees during cash shortages. Since business owners often need these funds quickly, traditional options like term loans may not be ideal for meeting urgent payroll needs.

Instead, more flexible financing solutions such as business lines of credit, invoice financing, invoice factoring, or merchant cash advances (MCAs) are often better suited. These options provide fast funding decisions and funding, allowing small businesses to cover immediate payroll obligations. While an MCA is not technically a loan, it offers quick access to capital based on future sales.

When Should You Get a Payroll Loan?

The best payroll for small business is intuitive, streamlined, and offers payroll features like time tracking, tax filing, and customer support. Unfortunately, no payroll service can simply put more money in your business bank account.

Payroll loans for small business hould only be used as a last resort when a small business is in danger of not meeting its payroll. Using a loan for payroll expenses can be expensive. If you need emergency funding, interest rates tend to be high and loan terms are punitive.

Here are the most common scenarios in which a payroll loan can be a suitable solution for a small business:

1. Short-Term Cash Shortage: A small business’s cash flow can be unpredictable. Something like unexpected equipment maintenance or rising costs of an employee benefit can put your business in a cash crunch and require a payroll loan. If businesses have accounts receivable expected soon , a business owner may use payroll financing to smooth out the cash shortfall and still make sure their employees and the government get their money without delay.
2. Seasonal or Temporary Labor: Seasonal businesses like vacation resorts typically hire additional employees in the busy season. Payroll, however, can be due before any revenue from the uptick in business arrives. A payroll loan can bridge that gap.
3. No Approval from Traditional Lenders: The process of being approved for a small business loan from a traditional lender can be lengthy and time-consuming. For small businesses that can’t afford to wait it out—or for those who cannot get approved for traditional business loans—and are in danger of missing payroll, a payroll loan might be the only option.

Before applying for a payroll loan, small business owners should ask themselves if they can repay it quickly. If not, they may need a longer-term financial solution. To ensure the best payroll for small business, make sure you’re borrowing enough to meet the next payroll, too. You don’t want to go back for more money repeatedly.

Payroll Financing Options for Small Businesses

Payroll protection loans can help small business owners in a cash crunch ensure that employees get their direct deposit on time. A full-service payroll provider supports bookkeeping and HR tools, as well as benefits administration like health insurance, while processing payroll automatically. Even the best payroll for small business, like Gusto or OnPay, however, cannot provide loans when you’re short on cash.

Small business owners have several options when it comes to financing payroll shortages.

Short-term loans

While term loans are generally not the best option for payroll business loans, it is possible to use them to cover payroll costs. Online lenders tend to work faster than traditional lenders like banks or credit unions and may be able to provide fast funding for your business. That can provide the peace of mind you need to come on payday.

Business line of credit

Small business owners in danger of missing payroll for more than a few months may want to consider opening a business line of credit. While short-term loans have limited repayment terms, business lines of credit involve revolving credit.

That means that a business owner is approved for a maximum loan amount, but you only pay interest on what you use. Once you’ve repaid the funds, plus interest, you’ll again have access to the full amount. This can offer user-friendly flexibility for growing businesses and startups with unpredictable expenses. Since the funds go right into your bank account, you can run payroll, file taxes, and pay for other business needs with a single line of credit.

Invoice financing

Invoice-based businesses can use their outstanding invoices as collateral to receive a cash advance from another business. This is effectively a garnishment on the invoice, however, as you’ll pay a percentage of the invoice to the lender once you’ve been paid.

Invoice financing is often easier to get than other types of payroll financing. New businesses with less of a credit history or a lower credit score are generally more likely to qualify for invoice financing since the value of the outstanding invoices outweighs the business's financial strength and credit score.

Invoice factoring

Invoice factoring differs from invoice financing because it sells open accounts receivable to a factoring company. The factoring company becomes responsible for collecting on the invoice, rather than the business itself. After the company collects the invoice, it sends the funds to the business minus a factoring fee.

Factoring companies have minimum and maximum amounts they will provide, and these amounts are typically determined by the size of the company. Since funding decisions are based on the credit of their customers, small businesses with bad credit or no credit can qualify for invoice factoring. There are no upfront fees involved in invoice factoring.

Regularly turning to methods like invoice financing and invoice factoring, however, is not wise if you want to run the best payroll for small business.

Merchant cash advance (MCA)

Using a merchant cash advance for-payroll expenses can also be a fast option for businesses with a shortfall of cash to make payroll. A merchant cash advance is not a loan; it is a lump sum of funds for merchants that is paid to them in advance of their future sales. Whenever the merchant makes a subsequent sale, a small amount of that sale is repaid to the merchant cash advance company (MCA).

Even with such an agreement, the advance must be paid in full, but it does not carry a defined covered period, which makes it a flexible form of financing that does not require fixed payments. Instead, payments fluctuate along with the business's sales. The cost of an MCA is determined using a factor rate as there are no fixed repayment terms or amounts.

MCAs charge a factor rate fee that is used to express the total amount that will be paid back. This is different than an interest rate, given that there is no fixed repayment term or fixed amounts. As such, this option works for small businesses that need flexible funding terms yet need enough funding to make their business more functional and cover expenses like payroll costs.

How Do You Get a Payroll Loan?

To run the best payroll for small business, you likely want to avoid payroll loans in the first place. However, sometimes you need a payroll solution, and you can’t fail to file small business payroll tax forms, or you’ll have the IRS on your back. Sometimes, you have no other choice but to pursue a payroll loan.

Payroll loans for small business may be available from both traditional and online lenders, depending on your personal credit score and business’s financial situation. Since businesses often need payroll loans fast, an online or alternative lender may be a better choice. Your online payroll service provider may be able to put you in touch with a lender.

The application process for a payroll loan can vary depending on the lender and type of lender. Traditional banks may want business owners to apply in person at a branch. Alternative lenders, meanwhile, typically offer a brief online application.

Both banks and alternative lenders will need basic information on the business, such as name, address, business structure, time in business, annual revenues, and number of full-time employees. Business owners – and any partners — should also be prepared to provide personal information such as their contact information and Social Security number.

Once the loan application is approved, the terms of the loan, such as the amount, interest rate, repayment amount, and repayment schedule, will be in the loan agreement.

Final Thoughts

The best payroll for small business can automate payroll, and even provide HR support. However, even when you have the best payroll software, like Gusto, ADP, Quickbooks Online, or OnPay, sometimes working capital comes up short.

When you’re at serious risk of missing payroll, it’s time to explore a payroll protection loan. While emergency funding doesn’t come cheap, it’s better to add some payroll costs than miss a payroll run completely.

FAQs on best payroll for small business

Why is it bad to miss payroll?

Missing payroll can have a major negative impact on a business. Not only does it sow panic among employees, some of whom will likely refuse to work until they’ve been paid, and it signals to lenders, partners, and customers that your business is in poor financial shape. Moreover, it may even have legal consequences.

How can you fund a payroll loan?

If you’re short on working capital and at risk of missing a payroll run, do some research on alternative lenders and speak to your payroll provider about possible solutions. Some common ways small business owners find payroll funding include business lines of credit, invoice financing, or merchant cash advances.

Should I get a payroll protection loan?

Payroll business loans tend to be expensive. Because businesses usually need them in an emergency, they lack any leverage and often need to turn to alternative lenders. As such, you should try to avoid taking out a payroll loan unless it’s absolutely necessary to avoid missing a payroll run.

What are the best payroll services?

Some of the best payroll services on the market today include Gusto, ADP, OnPay, and Quickbooks Online.

What should you get in a payroll service?

The leading payroll services provide bookkeeping and HR solutions like new hire onboarding, tax calculations, an employee portal to access pay stubs and payroll data, and many more user-friendly features.

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