No, it is not recommended to use a payday loan for business purposes, because they are higher interest products and designed for individuals who need money for emergencies.
It is very common that businesses need extra cash, especially shops, restaurants and even startups. Sometimes a quick injection can be used to pay suppliers, rent or even staff.
But realistically, payday loans are not designed for this purpose. For businesses that might struggle to repay them back, the cost of loan can really start to increase and you could find yourself paying way over the odds for a typical $500 loan.
Could I Use a Payday Loan For My Business?
Hypothetically, yes, you could use a payday loan for business purposes. Although every application is for an individual (not a business), if you are self-employed, you could transfer this into your business account or transfer the funds into a director’s loan – even if this is not recommended.
So if you needed money for your business, whether to pay staff, pay for advertising or pay suppliers and you had a tight deadline or were overdue, borrowing $600 or $1,000 through a payday loan could in theory give you a same day loan to help with your pressing bills.
In some circumstances, maybe a payday loan is more likely to be approved for a business owner who has bad credit – compared to applying with a local bank or traditional lender.
However, using a payday loan for business is not recommended by any lenders, ever and is illegal to offer to businesses by certain states laws such as California.
In terms of price, the average APR for a payday loan is around 200% to 400% depending on the state that you are based in.
This is significantly more expensive than other financial products and alternatives, especially things like personal loans, unsecured business loans or even credit cards, which often do the same thing if you need to borrow $700 or similar.
Why Are Payday Loans a Bad Idea For Businesses?
High costs – The cost of a typical payday loan is around 200% to 400% APR, or the way I like to look at it is around 30%-40% more of what you borrow. If you borrow $1,000, you will likely pay back around $1400 after 3 months. Whilst this might be convenient for the quick funds, this is very expensive and it the costs really start to add up if you cannot repay the loan back and incur extra fees and penalties. You ideally want to avoid getting into this scenario.
Shouldn’t be used for businesses – Businesses are delicate in the sense that they hire people and rely on cash flow to be successful. With this in mind, using a payday loan for business is risky and business owners should look for lower cost and more flexible options available.
Better alternatives available – There are a number of strong options available for businesses that need finance, even those that need it fast or within 24 to 48 hours. The use of credit cards, credit lines, credit unions, merchant cash advances or invoice factoring are very effective and all a fraction of the cost and often give a lot more time to pay off.
Could create dependency – Business performance is never predictable, if you get into the habit of using payday loans too often, it becomes expensive and hard to get out of, similar to a spiral of debt.
When Should You Use Payday Loans?
In practice, one should typically avoid payday loans because they are genuinely designed for emergencies or to help people through a difficult spell.
However, with 12 million Americans using payday loans every year, there is an important role for them in society, especially when people need to make a payment immediately and cannot wait for their income to arrive on payday.
Payday loans are often used for:
- Same day emergencies
- Household emergencies
- To pay rent, food or groceries
- To pay urgent bills
- To pay for car repairs
- To pay for medical or pet bills
- Funerals
- Childcare
Payday loans are not supposed to be used for:
- Paying other friends
- Paying for gifts, holidays or new cars
- Pay off other loans
- Businesses
What Types of Products Should You Use If Your Business Needs Money?
If your business needs money, especially because you have payment deadlines, cash flow shortages or overdue bills, there are a number of options available, particularly if you need money in 24 hours.
The alternatives include:
Invoice discounting – If you have future orders that have been made and signed, a lender can give you around 60% to 80% of the value of this invoice upfront, with a very small fee charged on top. This is ideal for people and businesses that rely on contracts, advance orders and very specific jobs such as caterers, building contractors, fashion designers, manufacturers and more.
Merchant cash advances – For places that take a lot of debit card or credit card payments, you can get a big advance on these through a merchant cash advance and repay over 3-12 months. It is ideal for clothing stores, hotels, restaurants and anywhere that takes card!
Secured or unsecured business loans – Taking our a business loan is very straightforward and the rates are very reasonable ranging from 6% to 12% APR. You may be eligible for larger amounts too, even as much as $25,000 or $50,000 if the loan is unsecured (not collateral) or even more like $100,000 or $1 million if you can use collateral such as property, vehicles, stock or anything else of value.
Credit cards / lines of credit – Credit cards do very similar things to payday loans in the sense that they let you put a credit limit towards purchases, whether it is $300 or $1,000 (or more depending on your limit). The interest rates can be 0% if you pay off your credit card bills on time (although a lot of business credit cards have monthly or annual sign up fees). For bad credit, the rates can be 36% APR, which is high but still a lot of better than payday loans.
Asking friends for help – So many successful businesses have thrived with the help of family and friends and it is certainly not uncommon. Your loved ones and dearest friends will often want to support you and help you to keep your business afloat, especially if there is a clear demand for your service, whether you work in restaurants, stores or anything else that serves the public.
In conclusion, one should always approach payday loans with caution because of their high interest rates and late fees if your cannot repay. This means that they are not a good fit for businesses and one should always consider the alternatives available to them if need be.