Payroll Loans vs. SBA Loans


At any given time, millions of small businesses are seeking some sort of financing with needs as varied as their value propositions.Fortunately, small businesses have many options for borrowing the cash they need, but they too vary widely in terms of how they address their cash needs.


On one end of the spectrum, many businesses often find themselves temporarily short of cash for funding operational expenses such as payroll. On the other end they many need a cash infusion to fund expansion plans involving the purchase of new equipment or production capabilities. Those two examples represent two completely different uses of capital which require two completely different financing solutions. Here’s a breakdown of how two financing options address the different needs of a business.

How Does a Payroll Loan Work?

It’s not uncommon for businesses to experience unsteady cash flow. It could be due to mounting overdue accounts receivables, a seasonal decline in business or even a rapid growth spurt. Regardless of the cause, a business needs to be able to have quick access to cash to cover necessary expenses, including payroll.  A payroll loan is a cash advance that can be obtained within a 24-hour period.

The business provides the lender with a postdated check for the total loan amount plus fees and is given a due date for repayment. If the loan is repaid by the due date, it is settled for the agreed upon interest fees, which can range between 15 and 30 percent. If the loan is not repaid on time, the lender is authorized by the terms of the agreement to cash the check. The borrower may also be liable for delinquent fees.

Obviously, payroll loans should be used sparingly and only for short-term cash needs. The high interest rates and strict repayment terms are not sustainable for most businesses which risk compounding their financial problems if they use them too often or cannot repay them quickly. However, the alternative of not making payroll on time can have even worse consequences. Aside from the possibility of losing good employees, businesses can face claims and other penalties from the state and the Department of Labor. If payroll taxes are not paid on time, the Internal Revenue Service (IRS) will enter the picture.

Another short term option to cover payroll is factoring, which can convert current accounts receivables into immediate cash. With factoring, the business sells its account receivables to a factoring lender for up to 95% percent of the invoice amount.

The factor then takes over the responsibility of collections. No fees are paid until the invoices are paid and then the factor deducts an interest fee which amounts to 1 to 3 percent of the cash advance. The advantages to the business are no fees, no debt to repay, and they have back office support for the collection of invoice payments.  Also, businesses don’t need to have great credit as the factor base their funding decision on the credit worthiness of their customers. Payroll factoring can take place as often as needed, and some businesses use it as a matter of course.

How Does an SBA Loan Work?

The Small Business Administration (SBA) offers several different loan programs for businesses with varying needs. For the startup or fledgling business the SBA Microloan program could be an excellent option. Loans in this program can range from $500 to $50,000.

These loans are issued and administered by non-bank microlenders designated to participate in SBA loan programs. They are more widely available to small businesses with poor or no credit histories and the application and approval process is typically more streamlined than a traditional bank. The interest rates charged by microlenders tend to be high – in the 10 to 15 percent range, but they can be much cheaper than a payroll loan and the loan terms are far less stringent.

For businesses with a strategic plan in place to expand, there are a number of other SBA programs, but only the microloan program would be right for true short term working capital needs like making payroll.

Note that although the SBA is not a lender, it does act as a loan guarantor, guaranteeing up to 90 percent of the loan value.  The borrower is responsible for the other 10 percent. This reduces the bank’s risk to almost zero.

Payroll Loans vs. SBA Loans

Whether it is financing new equipment or covering the payroll during a temporary cash squeeze, growing small businesses are going to need access to cash at some point. Payroll loans and SBA loans would both be suitable for the startup and fledgling business that needs quick access to cash, but payroll loans can be obtained within a day, while a microloan might take more than week.

One of the most notable advantages of a payroll loan is, if the business encounters frequent cash shortages, then a payroll loan may be more convenient. On the other hand, the primary advantages of a SBA loan is that it can help a business build a credit history, which can be very important in later stages when the business needs access to larger amounts of capital. Overall, for short-term cash needs businesses can utilize a payroll loan, and, for long term needs, a Small Business Administration loan would be the best solution.

Originally Published

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