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Should I take out a loan to make my business’s payroll?

A loan may be less expensive than a credit card cash advance, but the cheaper option may not be the better one for your business

Summary

A loan may be less expensive than a cash advance from your credit card, but the cheaper option may not be the better one for your business. You should consider other cash flow needs and your ability to build credit, among other factors.

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Dear Your Business Credit,

I run a small creative agency that sometimes has cash flow problems when clients pay us late. I’m looking into options to tide us over when we’re short of money to make payroll. We have three people on payroll.

I’ve just gotten an offer for funding from my invoicing software. They offer a one-year loan at a 24 percent APR. There are no fees to borrow the money, and if you pay it off early, you don’t have to pay any penalties.

Would I be better off getting a loan like this than getting a business credit card that offers a cash advance? I was offered a business credit card that offers cash advances, with a 3 percent fee. The interest rate is about the same as the loan from the invoicing software company. – Donna

Dear Donna,

It’s great that you are shopping around for the best financing option. When you borrow money for a small business, it’s important to consider both the cost of the money and your long-term goals for the business.

From your description, it sounds like the loan is little less expensive than the cash advance on your credit card, so from a purely financial standpoint, it seems like the loan will serve you best. But the cheapest option is not always the one you should choose.

Check out all the answers from our credit card experts.

Ask Elaine a question.

With a loan, you’ll have more credit available on your card

One thing to take into account is how much room you need on your credit card to cover other typical purchases in a month. If, for instance, you travel a lot, borrowing to make payroll on your credit card may use up needed credit on the credit card.

You might find yourself in a jam if you need to buy an airline ticket. And, if you use up most of your credit, you could find yourself with high enough credit utilization that your credit score could go down.

If you use the loan from your invoicing software company, you’ll still have credit available on your business credit card.

However, if you don’t make many business purchases, you may not need much room on your credit card. You may find it speedier to get a cash advance from the nearest ATM than to apply for the loan. Your time is money as a small-business owner.

See related:  Should I use a business card’s cash advance to make payroll?

Check to make sure the loan is reported to credit bureaus

Another thing to take into account is whether the financing you use will give you opportunities to build your business credit history. Using a business credit card will generally allow you to build up a credit history for your business.

The loans that invoicing software companies offer may allow you to build business credit, too, but it’s important to read the fine print to be sure. QuickBooks Capital, one popular invoicing software, says it reports the performance of the small business loans it makes to its software users to two credit bureaus, Experian and Dun & Bradstreet.

Either option will likely require a personal guarantee

It’s important to note that most credit available to small businesses from credit card companies, banks and sources like QuickBooks requires a personal guarantee from the owner. The lenders want to make sure you will pay them back, even if the business goes under. Nonetheless, when you use business credit, it counts toward your business credit history.

See related:  Are there any business credit cards that don’t require a personal guarantee?

Address the root cause of your payroll issues

There’s one more issue to think about here: Generally speaking, if you’re having trouble making payroll, there’s an issue you need to address in the business. Either you’re not generating enough sales, the money isn’t coming in fast enough (because you’re invoicing too slowly or clients are paying you late), or your overhead is too high.

By figuring out what area of your business you need to work on, you’ll find that your need to borrow to make payroll is much less.

What’s up next?

In Your Business Credit

Should I roll over a cash advance to a 0 percent APR balance transfer card?

It might be worthwhile to transfer a cash advance amount to a promotional 0 percent APR balance transfer offer, if you are disciplined enough to pay it off in time.  

Published: November 2, 2019

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