As a business owner, you understand the ebbs and flows of cash coming in and out of your business. However, there may come a time when cash is flowing out quicker than it’s coming in.
In this situation, you might find yourself in need of fast access to financing so you can pay your employees on time and in full — one of the most important things to keep your business running.
There are certain types of loans that are more appropriate for making payroll than others; these are the three best loan options to help you cover payroll, along with crucial tips for avoiding a payroll crunch in the future.
1. Business Lines of Credit
A business line of credit is a revolving credit loan that allows your business to borrow however much money you need at a given time (up to your credit limit). With this financing solution, you’ll only be responsible for interest on the funds you’ve actually drawn from your business line of credit. Plus, once you repay the amount you drew, plus interest, in full, your business will again have access to the full credit line.
This type of loan is flexible, and having it in your business’s back pocket will allow you to cover any number of unexpected gaps that might arise in your finances from month to month. And it just so happens that making payroll is one of the most common reasons a small business owner might tap into a business line of credit.
2. Invoice Financing
In a perfect world, you have a steady stream of outgoing and fulfilled invoices, paid in full and in a timely manner. And in this ideal setup, making payroll is no problem.
However, as every business owner knows, this timely dream rarely comes true. Inevitably, you’ll have clients who fall behind on payments or don’t pay invoices in full. When that happens, it disrupts the flow of your business’s operations and can leave you without cash for making payroll.
This is the unfortunate reality that invoice financing aims to address. Invoice financing is a type of business loan that will advance your business a portion of its outstanding invoices.
Invoice financing will, of course, come at a cost — this cost will look like interest, based on how long you have to wait for your customer to pay the invoice in full.
With an approval process that can take as little as one day, invoice financing will grant you access to the majority of your outstanding invoice value overnight. This quick financing will, in turn, free up your business’s capital to help you meet your payroll obligations.
3. Short-Term Loans
As the name implies, short-term loans reach maturity quickly — the typical term for short-term financing will generally give you anywhere from three to 18 months to repay your principal loan amount, plus interest. Because of this shorter repayment term, scheduled payments can occur on a daily or weekly basis for short-term loans.
Short-term loans address short-term financing needs, which makes them a solid financing fit for covering payroll during a slow season or an unexpected lull in business.
However, because the repayment structure for short-term loans is fast-paced and costly, you’ll need to make sure you can keep up with the short-term loan repayments that will be happening on a daily or weekly basis.
How to Avoid Payroll Woes in the Future
Of course, the best way to cover payroll is to plan your business’s finances carefully so you’re not left scrambling for a loan at the eleventh hour.
But what are some specific actions you can take to make sure you don’t face payroll woes in the future?
Take a look at these three action items for tackling your payroll troubles head-on:
Keep an Eye on Your P&L
As a business owner, you should look to your profit and loss statement as your guiding light.
Understanding exactly where your money is coming from — and going — on a monthly basis is critical for many reasons, not the least of which is that it allows you to make realistic projections for the future.
If you find your overall spending is consistently outpacing your earnings, you need to re-evaluate your costs. Whether you scale back your business’s marketing budget or make the difficult decision to say goodbye to a member of your team, dialing back on your business’s spending will help you make payroll without seeking a business loan.
Revisit Your Budget
At the beginning of the year, you likely put together a plan for your annual spending. If, during the course of the year, you find you were overly optimistic about your earnings projections, you need to go back to the drawing board and make adjustments.
Take the time to assess how each line item on the budget drives revenue. If there’s an item that’s critical to your financial success, keep that item as-is. That said, if there are costs with a more tenuous link to revenue, consider that the place to scale back.
Either way, if you’re having trouble making payroll without financing, you’ll need to reconsider how you’re projecting your business’s budget.
The best way to avoid a cash-flow issue is to see it coming a mile away. Do you have a client who’s later and later with repayment of each invoice he receives? It might be time to reconsider your relationship.
Is your business a seasonal one? Have cash reserves on hand or financing options sorted before you hit your slow months. This way, you won’t have to rush at the last minute, and you might be able to secure a loan with a more affordable interest rate.
Even the savviest business owners can experience cash-flow issues. With diligent financial planning, a business owner can still see cash flow suddenly freeze up.
Business loans — namely, business lines of credit, invoice financing and short term loans — are ideal for keeping your day-to-day operations running smoothly. As you zoom out to address the issues creating financial speed bumps for your business, you can rest easy knowing you’ll be able to pay your employees on time — and in full — thanks to these fast financing solutions.