This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Can business loans be used for payroll?
Yes. Operational expenses are a common use of small business loans. Payroll is also a revenue-generating activity, since your business depends on your employees to provide the goods and services your company sells. You may use a business loan for your payroll costs, including:
- Salaries, wages, commissions, and bonuses
- Paid time off and other benefits
While you may use business loans for other purposes, prioritizing payroll is a common use of funds. Missing payroll could hurt morale, lead employees to resign, and result in consequences.
What is a payroll loan?
A payroll loan refers to how you use the money rather than a specific type of loan. You may choose from different types of financing if you need money for payroll, such as an unsecured small business loan, secured loan, business line of credit, or alternative funding sources. Each type has its pros and cons, including how long it takes to receive the funds, the cost and loan fees, and the eligibility requirements.
How do payroll loans work?
Payroll loans will work differently depending on the type of loan. However, unlike with some secured loans (e.g., an auto loan where the lender pays the dealer directly), a payroll-loan lender won’t handle your payroll for you.
You’ll generally have the funds deposited into your business bank account and can then use the money to run payroll. After you receive the loan, you’ll also start making repayments per the loan agreement.
Payroll funding options
You can get funding for your business expenses from various types of lenders and financial services organizations. Some of the most common options are:
Business line of credit
A business line of credit is often a revolving credit account. Like using a credit card, your line of credit may allow you to borrow against your credit line until you reach the limit. You may also pay down your balance to free up available credit and take out new loans (or “draws”) without applying for a new account.
A business line of credit gives you the option of taking out a loan if you need money for payroll (or other expenses), and you’ll only pay interest or loan fees on the amount you borrow. There may be additional draw fees — similar to an origination fee on an installment loan — and some lenders may charge a maintenance fee or inactivity fee.
Each withdrawal may have a fixed repayment term and a variable interest rate or monthly loan fee.
Small business loans
A small business loan is either an unsecured or secured installment loan. With a small business loan, you may pay an origination fee and receive the full loan amount upfront. You’ll then repay the loan over a predetermined period, in many cases with weekly or monthly payments. You could use this type of loan, for example, to cover the upfront costs that can come with hiring and training new employees.
You may be able to find loans with either a fixed or variable interest rate. Variable-rate loans tend to start with a lower rate, while fixed-rate loans may offer less risk because the rate doesn’t change. In either case, the interest will start accruing on your loan right away.
Additionally, you may be able to choose between a secured or unsecured loan. Secured loans may offer lower interest rates if you offer collateral. With an unsecured loan, your eligibility and loan terms may involve additional considerations regarding your personal and business creditworthiness.
Short-term loans
A short-term business loan is a small business loan that has a short repayment term, such as three months to a year, and may have daily, weekly, or monthly payments. These loans may be used for things like payroll, working capital, marketing, or upfront costs associated with larger projects.
Invoice factoring
Invoice factoring is an alternative form of funding that can give you money for your payroll expenses — particularly if you frequently experience cash crunches while waiting for clients to pay your invoices.
When you factor an invoice, you sell the invoice to a factoring company that pays you a portion of the invoice amount upfront. Your clients then send the invoice payment to the factoring company, instead of directly to you. The factoring company then keeps a portion for their service and forwards the remaining balance to you.
Invoice factoring may only be an option if you sell to other businesses that pay you with terms (e.g., after 60 or 90 days). You will want to carefully review the terms of a factoring agreement to ensure you’re only factoring the expenses you need to cover and to understand any associates fees.
Merchant cash advances
A merchant cash advance (MCA) gives you an upfront payment in exchange for a portion of your future sales. While an MCA isn’t a traditional bank loan, it may offer fast funding that you can use for payroll.
MCAs can often be based on daily sales rather than credit or collateral. However, you may need to accept cards or online payments and have those sales rerouted to the MCA provider, which may charge a fee before sending you the remainder.
When should a business consider employee payroll loans?
A payroll loan could be a good option if you’re dealing with a one-off or short-term setback.
A payroll loan could also be a good option when you’re continuing to grow your business. You may need to hire new employees or contractors because of anticipated growth or a large project. The loan could help you cover these upfront expenses until your business expands or make payroll. Or if sales have fallen short or you’re heading into a slow season, a payroll loan could help you bridge that gap.
Choosing the right payroll financing
Finding the right funding for your business can be challenging. If you’re looking for payroll financing, consider the lenders’ requirements, application process, and when you will need the funds.
Some lenders may offer an online application for a business line of credit. If approved, businesses may access a credit line to help support payroll and other business expenses.
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
