What’s the Right Way to Use Financing of Your Payroll to Make Payroll
When it comes to getting a small business loan for financing of your payroll some people use a bank loan, account receivable Factoring, payroll financing or friends/family loan but the key is to have a plan in place to pay the loan back.
Many times, small businesses take out financing of your payroll because of an unexpected expense or large increase in sales, but what is critical is running projections of when the business will be able to pay the money off.
If the business is using Factoring, which is very expensive if used for a long period of time, the business owner needs to look at what he/she can do to stop using Factoring as soon as possible so that the business is funding their company through current cash flow or through a much cheaper bank loan. Financing of your payroll through Payroll Financing Solutions is a good solution.
When I started my second company I learned quickly that if you have receivables you can get financing and I used Factoring. However, I knew the key was to get off the Factor as soon as I could and in 18 months I went from an Account Receivable Factor to an Asset based lender. Nine months later I was self funding my company out of my own cash flow. I then had a growing company with a cash flow history and was able to get a bank line of credit. The key here is that you need to have a plan in place to pay off a loan and to become self financed.
Payroll Financing is a great option for emergency purposes because the money can be paid back with no penalty in as little as 7 days. However, if you wait and pay the money back over 6 months, then the loan can be expensive. Even if a business owner has to take payroll financing funding, he/she should sit down and figure out when you will have money coming in ( above current expenses) and put a plan in place to pay off the money. If you can’t figure out how to pay off the money based on incoming receivables then it is time to look at your expenses (including staff) and begin to cut.
Whenever you have to borrow money, it is a wake up call that you have to 1) reduce expenses 2) increase sales 3) better collect receivables or 4) plan better. Because of the optimism that most business owners have, they often believe that they can increase sales but more often, the answer is better planning, reducing expenses or cutting staff.
Its never easy but by planning, you live to fight another day.
Financing Solutions (www.payrollfinancingsolutions.com) provides fast business funding of $5,000-$100,000 to good small businesses with sales of $500,000-$7 million that can be used for working capital.