Short on Cash? Guide to Payroll Loans & Business Financing

Updated on:
August 17, 2023

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As a small business owner, you understand that managing cash flow is essential to keeping your business running smoothly. One of the most significant expenses for any business is employee payroll. The ability to pay employees on time is critical to maintaining morale and keeping your business running smoothly. However, sometimes businesses can face unexpected expenses or cash flow problems, making it challenging to cover payroll expenses. This is where payroll financing come into play.

Payroll funding is a type of financing that is specifically designed to help small business owners cover payroll costs. These forms of funding are typically short-term which allow businesses to pay their employees on time, even when they’re experiencing cash flow problems. In this blog post, we will explain everything you need to know about various payroll funding options, the pros and cons of each, and the basic requirements to qualify.

Types of Payroll Funding

When it comes to ensuring you can make payroll, there are several funding options that small business owners can consider, each with its unique features and requirements. Here are some of the most common available:


Factoring is a process by which a factoring company purchases a business’s outstanding invoices at a discount. The business owner receives immediate cash for the invoices, and the factoring company takes on the responsibility of collecting the invoice payments from the customers.


Improves cash flow

By selling unpaid invoices to a factoring company, businesses can access short-term financing that can help them cover immediate expenses and invest in growth opportunities.

No debt incurred

Unlike traditional loans, factoring does not create debt on a business’s balance sheet. Instead, it’s a transaction that involves the sale of an asset (unpaid invoices) to a provider.

Streamlines billing and collection

Factoring companies can help businesses streamline their billing and collection processes, saving time and resources.

Credit risk management

Factoring companies may assume responsibility for the credit risk associated with the purchased invoices, freeing up the business to focus on other aspects of its operations.



Factoring fees can be relatively high, often ranging from 1-5% of the invoice value. While this may be a worthwhile expense for businesses that need immediate access to cash, it can also cut into their profit margins.

Loss of control

When a business sells its unpaid invoices to a factoring company, it gives up some degree of control over its accounts receivable. The factoring company will take over the billing and collection process, which may not align with the business’s customer relationship strategy.

Limited funding

Factoring companies may have limits on the amount of funding they can provide to a business. This could be a problem for businesses that require more financing than a factoring company is able to offer.

Customer perception

If a business’s customers are aware that their invoices are being sold to a factoring company, it could have a negative impact on their perception of the business’s financial stability.

Qualification requirements

Factoring companies may have strict qualification requirements, such as a minimum invoice amount or a certain length of time in business. This could make it difficult for some businesses to access factoring services.

Merchant Cash Advance

A merchant cash advance is a type of financing where a lump sum of cash is provided to a business in exchange for a percentage of the business’s future sales. This type of financing is particularly useful for businesses that have a high volume of credit card transactions, but can be used for any type of company.


Improves cash flow

MCAs can provide short-term financing solutions that can help businesses cover immediate expenses such as payroll, invest in growth opportunities, and improve their cash flow.

Flexible repayment

MCAs are typically repaid through a percentage of the business’s future sales, which means that the repayment amount can vary depending on how much the business is earning. This can provide some flexibility for businesses that may be experiencing fluctuations in revenue.

Fast funding

MCAs can often be funded quickly, sometimes with just a single business day, which can be crucial for businesses that need immediate access to financing which is often true of cash flow for payroll.

No hard credit check

MCA providers typically do not require a hard credit check, which can be beneficial for businesses with poor credit histories or those that have been denied traditional loans.


High costs

MCAs can come with fees, which can increase the cost of the financing.

Limited funding

MCAs may not be able to provide businesses with as much funding as they need, particularly if they are in need of larger amounts of financing. In the case of payroll, this often not an issue as companies like LCF can fund up to $2 million which often covers payroll and leaves cash available for other business needs.

Short-Term Business Loans

Short-term business loans are another financing option that businesses can use to cover payroll expenses. You’ll have to pay interest on these loans and they typically have a repayment period of 3 to 18 months and are designed to provide working capital for small business owners.


Quick funding

Short-term business loans can be funded quickly, usually in around a week, making it an attractive financing solution for businesses that need immediate access to capital.

Flexible repayment

Short-term business loans are repaid over a short period of time, typically with monthly payments, which can provide businesses with flexibility in managing their cash flow.

Builds credit

Repaying a short-term business loan on time can help businesses build their credit score, making it easier to access financing in the future.


High interest rates

Short-term business loans often come with high interest rates, which can significantly increase the cost of borrowing. Businesses should carefully consider the cost of the loan and ensure that they will be able to repay it on time.

Short repayment term

While a short repayment term can be beneficial for some businesses, it can also mean that the monthly payments are higher than they would be with a longer-term loan. This can impact a business’s cash flow, making it more difficult to cover other expenses.

Limited funding

Short-term business loans may not be able to provide businesses with the amount of funding they need, particularly if they are in need of larger amounts of financing.

Potential for default

Because short-term business loans are often unsecured, providers may have less recourse if a business is unable to make payments. This can lead to legal action or other negative consequences for the business.

Reputation risks

If a business takes out multiple short-term loans or is unable to repay a loan on time, it can damage its reputation with lenders and other financial institutions.

Basic Requirements to Qualify

The requirements to qualify for a payroll funding will vary; however, there are some basic requirements that most financiers will look for when considering a small business funding application:

Credit Score & Credit History

Providers will typically check a business owner’s credit score to assess their creditworthiness. A good credit score can increase the chances of getting approved for funding and may also result in more favorable terms.

Likewise, some may also look at the business owner’s personal credit history to assess their creditworthiness.

A business owner’s personal credit score is a numerical representation of their creditworthiness. It is calculated based on their credit history, which includes information about their past credit accounts, payment history, and outstanding debts. Providers use this information to assess the likelihood that the business owner will repay.

For certain types of funding like loans, a good personal credit score can increase the chances of getting approved for funding and may result in more favorable terms, such as a lower factor or interest rate or longer repayment period. On the other hand, a poor personal credit score can make it difficult to get approved, and may result in higher factor or interest rates or stricter terms.

Providers may also look at the business owner’s personal credit history to assess their financial management skills. For example, if the business owner has a history of missed payments or high levels of debt, it may suggest that they have poor financial management skills, which could impact their ability to repay.

Annual Revenue

Funders will also look at a business’s annual revenue to determine whether the business can afford to repay, with most requiring a minimum annual revenue of $100,000.

Bank Account

Most providers will require the business to have a checking account that is at least six months old. This allows the provider to verify the business’s financial history and cash flow. However, not all types of funding, nor all types of funders, require this. LCF simply requires as little as three months. Learn more about how we can work with newer businesses to get them the cash they need.

Business Expenses

When a provider evaluates a small business funding application, they not only look at the business’s ability to pay back the amount funded but also assess the business’s overall financial health. One way they do this is by reviewing the business’s other expenses, such as rent, utilities, and inventory costs.

By reviewing the business’s other expenses, funders can get a better understanding of how the business operates and how it manages its cash flow. For example, if a business has high rent or utility costs, it may indicate that the business is operating in a high-cost area, which could impact its profitability. If the business has high inventory costs, it may suggest that the business is struggling to manage its inventory efficiently, which could impact its ability to generate revenue.

Application Process

Small business owners will typically need to complete an application process that includes providing financial statements, tax returns, and other documentation to verify their financial history. But again, not all funders are created equal in this aspect. Banks will often require much more documentation, while alternative funders require less. At The LCF Group, there is no need to present a 20-page business plan or your entire credit history. If you simply show us a few months of revenue, we can usually make an offer.


Payroll financing can be a valuable source of funding for small business owners who need to cover payroll expenses quickly. There are several payroll funding options and alternative funding available, including factoring, merchant cash advances, business lines of credit, and short-term business loans.

Before deciding to take out funding, it’s important to understand the pros and cons of this type of financing, as well as the basic requirements to qualify. Small business owners should also consider alternative lenders and financing options, such as invoice factoring and SBA loans, when looking for funding to cover payroll expenses and other business expenses. By carefully considering their options and working with a reputable company, small business owners can find the financing they need to keep their businesses running smoothly.

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