Find out all about hiring financing, and whether it is a good fit for your business needs.
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Despite the best of efforts or intentions, your business financials may get thrown out of whack due to unforeseen circumstances - such as downturns and late invoice payments. At times like these, it can be a challenge covering your payroll expenses in time. Here’s where payroll financing can come in handy.
Common uses of hiring financing include:
Recruit new employees: Recruiting new employees is a significant investment - particularly for small businesses. As such, business owners often delay hiring for too long - much to the detriment of their business. With payroll financing, you’ll be better positioned to bring on new hires to support the growth of your venture.
Hire seasonal staff: External financing can be a handy tool for businesses that require seasonal or temporary staff on a regular basis, such as restaurants and retailers. As these expenses tend to be predictable, business owners can obtain a loan or financing facility well ahead before the busy season starts to fill out their hiring needs.
Pay employees during lull periods and downturns: From economic downturns, to unexpected expenses or the loss of a major project, there are many factors that can adversely impact your cash flow - as well as your capacity to pay your employees on time. In situations like these, it can be helpful to tap on financing solutions like a line or credit or short term loan.
Business restructuring: As the market and consumer demand continually evolves, you might discern a need to bring on new hires, or let your employees go in order to provide different products and services. Obtaining external financing can help you manage your workforce expenses in the interim period.
Line of credit
Think of a line of credit as a credit card. Borrowers are provided with access to a pre-approved sum, which they can draw from as and when needed. Interest is charged only on the amount that is drawn, and once repaid, they can draw from the line of credit repeatedly.
Invoice financing refers to a short-term financing option that enables businesses to obtain capital using their unpaid invoices.
They can do this through two ways: invoice factoring, which refers to an agreement between a business and a third party company (also known as the factor), where the factor purchases the invoices at a reduced price and collects them on behalf of the business. The second option, invoice discounting, differs from invoice factoring in that the borrower retains control of its sales ledger and collection of payment - rather than selling its invoices to a factor.
Merchant cash advance
A merchant cash advance (MCA) isn’t actually a loan; it’s an advance of funds based on your credit card transactions. Through a provider, you’ll obtain an advance payment, which will be repaid with a percentage of your daily or weekly credit card sales. This is a financing option suited for businesses with a high volume of credit card sales, such as restaurants, retail businesses and beauty salons.
Short term loan
A short term loan refers to a lump sum loan with a repayment period of less than six months. These loans typically have less stringent requirements (compared to financing solutions like a line of credit), and offer quick access to funding - which makes it a great option for businesses that require payroll funding on short notice.
Assess your needs
To choose a financing solution that’ll best meet your business needs, you’ll need to ask yourself the two key questions: “How much money do I need?” and “Will I require financing on a recurring basis?”
For example, if you’re uncertain about how much external financing you’ll need at a given point in time, or know that you’ll need to hire temporary staff at specific periods across the year, a flexible solution like a line of credit will be your best financing option.
With a line of credit, it’s all about timing your application right
It helps to think of a line of credit as a cash cushion or an emergency fund of sorts - one that you can tap whenever the need arises. As such, you’ll want to obtain your line of credit well in advance - when you don’t actually require external financing. The best time to make your application is when your revenues are trending up and you have positive cash flow, as you’ll appear as an attractive borrower to potential lenders, and stand a higher chance of getting your application approved.
Open, timely communication is key
While this final tip doesn’t directly relate to the process of your hiring financing application, it’s an important factor to keep in mind nonetheless - particularly as communicating to employees about salary delays is an area that small business owners often find challenging to navigate.
In an Inc. article, Donald Todrin, founder of Second Wind Consultants shared: “What I have found in my consulting business is that, more often than not, small business owners are embarrassed and worried about results, so they typically handle [the situation] emotionally. This usually means that they don’t tell anybody until 10 minutes before they’re supposed to get their checks.”
If you’re unsure about how to start the conversation, you may begin by sharing information about the company’s finances - such as your budget and cash flow projections - to show where you’ve run into a problem, before explaining how you’ll get your financials back on track to pay off their salaries.
Stringent requirements - such as having a minimum operational track record of two to three years, or a minimum annual revenue of $200,000 - aside, the processes for traditional loan applications can be time-consuming. As such, these financing options likely aren’t a good fit for small businesses seeking payroll funding on short notice.
With online lending platforms like Aspire, loan application processes are convenient, streamlined and speedy - submitting an application takes a matter of minutes, and you’ll be notified of your loan approval status in just 24 hours.