Your employees may find themselves in a variety of scenarios where the next payday can’t arrive fast enough. It’s common for employers to wish to assist employees through trying times and prevent them from experiencing financial hardship due to an untimely bill. Cash advances are a great way to help employees who have fallen on hard times or need some cash quickly.
What is a Payroll Advance?
A payroll advance is a cash advance against future paychecks. In other words, the employee pays back the loan over time. The benefit of this arrangement is that it gives employees access to money in the short term, which may be useful when they are faced with an unforeseen financial crisis.
For example, if your employee needs to fix their car and can’t afford it on their own, you can support your employees by offering a cash advance so that they can get the car fixed without having to go into debt by getting a credit card or taking out another loan from somewhere else.
How Does a Payroll Advance Work?
The first step is to specify which employees and under what circumstances they may request an advance. This frequently takes the shape of a payroll advance policy, which streamlines the approval procedure. Employees can get payroll advances through a cheque, direct deposit, or any other alternative payment method that is usually used to pay employee wages.
It involves different steps:
- Establishing standards and regulations for paycheck advances
- Accepting the request of the employee and putting the advance in writing
- Releasing the pay advance
- Obtaining a receipt confirmation
- Adding the change to your accounting records
- In charge of the repayment
Payroll advances are often used as a way for employees who need money immediately (and who don’t have access to other sources) to get money quickly without having to wait.
Payroll Advances vs. Payday Loans
Payroll advances and payday loans are both ways for employees to get money quickly. However, they are very different in terms of how they work and the amount of interest that is charged.
Employees who accept a payroll advance, often known as a payday advance, are given the money that would have been in their next paycheck. Advances are an optional employee perk that the company offers; they typically have no added costs or interest.
While a payday loan is also an option for people who need to borrow money, it can also be a way for employees to get the cash they need quickly. It’s a small, short-term loan from a payday lender at a high-interest rate. Most payday loans must be paid back within 14 to 30 business days.
Payday lending businesses must go by a set of regulations in every state that permits them, and Oklahoma is no different. Does Oklahoma do payday loans? Residents of Oklahoma are allowed to take out payday loans. These loans are undoubtedly quick; financing may be made accessible in as little as 24 hours. However, they come with a catch. Because of their severely high interest rates and need to be repaid right away, you will find yourself in financially tight situations. Instead of having to help you, it might get you in more trouble. So think twice, especially that there are other accessible credit loan solutions online.
Create a Payroll Advance Policy
The easiest method to manage salary advances and avoid any issues is to establish a thorough payroll advance policy that describes the steps that must be taken and specify the precise conditions that both the employee and the company must adhere to. This will let your employees know what the process is and how it works.
The policy should include:
- The amount of money that can be borrowed
- How often they can borrow (e.g., only once every two months)
- How long do they need to repay the advance before taking another one (e.g., within 30 days)
- Exceptional circumstances
Paycheck advances shouldn’t become a regular source of income for your employees; instead, they should only be used in dire circumstances. As a result, you should restrict the number of times an advance may be sought, perhaps to twice annually.
How to Avoid Problems with Payroll Advances
Payroll advances are different from payday loans in that they’re usually used to cover unexpected expenses. Payday loans, on the other hand, are meant to cover expenses such as rent and utilities.
Payroll advances should be given out only when necessary—such as after an employee has been hospitalized for a long period or had their car break down unexpectedly and can’t make it to work for an extended period. You must explain this distinction to your employees so that they don’t misuse your generosity by taking advantage of the company’s good faith.
It’s also important for employers to understand how much money they are willing to lend out in payroll advances and ensure that employees understand what is expected from them once they receive this form of payment from their employer.
A payroll advance is a great way to help employees who require cash, without getting into the more risky world of payday loans. It can also be a way to build trust and loyalty in your company, as well as demonstrate that you care about your employees’ financial security.