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Payroll doesn't wait for a check to clear. Even when a big customer is slow to pay, or you're in the middle of a slow season, you still need the money in your checking account to pay before it's due.
That's where payroll loans come in. They're a type of working capital loan that covers wages for your employees and the payroll taxes that come with them. Depending on your financial situation, there are a few different types of business financing you can use to cover payroll.
I've spent years helping small and midsize business owners cover payroll. Below, I'll go over what payroll loans are, what they cost, and the tax implications of missing a payment. I'll also break down each payroll loan option available through Clarify Capital's lender network.
| Financing type | Speed to funding | Typical cost | Repayment |
|---|---|---|---|
| Short-term business loan | As fast as same day | APRs starting at 6% | Fixed weekly or monthly payments over 6 to 36 months |
| Business line of credit | As fast as same day | APRs as low as 6%, charged only on what you draw | Weekly or monthly payments over 6 to 36 months |
| Merchant cash advance | As fast as same day | Factor rates from 1.08 to 1.45 | A share of future sales, typically collected daily or weekly |
| Invoice factoring | 1 to 2 weeks | 0.5% to 5% of the invoice per month | Settles when your customer pays, typically in 30, 60, or 90 days |
| U.S. Small Business Administration (SBA) loan | Typically 30 to 90 days | Prime rate plus an SBA-capped spread | Monthly payments for up to 10 years on working capital loans |
Why Missing Payroll Is Riskier Than Missing a Bill
Missing payroll comes with specific tax implications for your business. Each paycheck you process includes federal income tax and your employees' share of Social Security and Medicare. These are “trust fund taxes.” The Internal Revenue Service (IRS) can charge you the Trust Fund Recovery Penalty, which equals the unpaid trust fund balance if these taxes go unpaid.
You're personally liable for these fees, and the IRS can collect it from your own assets through a federal tax lien or levy, even if your business is still operating.
There's also a penalty for late deposits. The IRS failure-to-deposit penalty increases the longer your payroll goes unpaid:
| How late the deposit is | Penalty |
|---|---|
| 1 to 5 calendar days | 2% of the unpaid deposit |
| 6 to 15 calendar days | 5% of the unpaid deposit |
| More than 15 calendar days | 10% of the unpaid deposit |
| More than 10 days after your first IRS notice | 15% of the unpaid deposit |
Wages have their own deadline. Under federal law you must pay regularly on your scheduled payday for each pay period. Most states set how frequently you have to pay. Check with the Department of Labor to see what applies in your area.
Match Financing to Your Payroll Date
Payroll providers usually pull funds the day before payday, so it's important to check your cutoff date before applying for financing. Same-day business loans and fast business loans fund in the shortest time frame, but you may end up paying more in interest.
Below, I'll break down what payroll loan makes the most sense based on your needs:
Payroll is tomorrow
Both short-term loans, business line of credit, and merchant cash advances (MCA) can fund the same day. Lenders base approval on recent bank statements and revenue. MCAs typically cost more than short-term loans.
Payroll is this week
A few more days gives you time to shop around. Annual percentage rates (APRs) and repayment terms vary, so a side-by-side review of your options can help you pick the best one. A short-term loan, a merchant cash advance, and a business line of credit work here.
Payroll is two weeks out
If you have a little more time and you're waiting on a customer to pay you, invoice factoring may be a fit. A factoring company advances against your unpaid invoices. Funding takes one to two weeks. Only use this if you're comfortable with a third party reaching out to your clients.
Payroll is a month or more out
SBA loans fund in as quickly as two weeks, but typically take 30 to 90 days. These are some of the least expensive payroll loans on the list, but also take the longest to finance. Borrow up to $5 million.
