Understanding The Concept of Payroll Advance and Its Benefits
A recent report from LendingClub finds that 60% of Americans live paycheck-to-paycheck. This means that half the population in the US is patiently waiting for their salary to be released biweekly or monthly, depending on their pay cycle.
But with inflation going on and an unlivable minimum wage, how will they face an emergency expense when it's already difficult to do some budgeting for their daily expenses?
If your business runs on payroll, you must always consider the economic factors that can affect your employees' personal finance. Try to fill in their shoes and see things from their perspective. Giving them access to a payroll advance can be a great lifesaver, especially in unexpected financial situations. But what are payroll advances, really?
Introduction to Payroll Advance
A payroll advance, also known as a salary advance, is a financial agreement between the employee and employer that gives the employee access to their wages before their actual payday. It's essentially a short-term loan that they will pay back in future paychecks. So, instead of taking out a personal loan, they can just request a payroll advance to pay emergency expenses.
How Does It Work?
It always starts with an employee submitting a payroll advance request. It can be written or emailed, so long as it can be used for proof whenever some issues may occur. After the request is submitted, both parties will sign an agreement regarding the repayment terms, like if it should be paid in full or in installments from the next paychecks. Once approved after careful consideration, the employee will receive their salary early.
Here are a few tips that you can use to streamline the process:
Establish guidelines: Have a payroll advance policy, which should tackle their eligibility for a certain loan amount (minimum and maximum loans), when they can request in the billing cycle, the interest rates, and more.
Put everything into writing: All requests and approvals/rejections should all be in writing—physical or digital. It should include the total advance amount, repayment terms, and other necessary information.
Require confirmation of receipt: Once you issue the advance payment, ask the employee to sign off when received. This can help resolve any dispute in the future.
Keep everything on record: Always record all processes in your bookkeeping or payroll processing software for accuracy and transparency.
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Benefits for Employees:
Financial Security
Payroll advance offers financial security to employees by giving them access to their wages when they're in a tight spot money-wise. For instance, if multiple bills are coming at once and they already maxed out their personal loan and have no other options, they can request a payroll advance to cover all those expenses.
Reduces Stress
When you're living paycheck-to-paycheck and are only paid minimum wage, money will always be the primary source of your problems. With the cost of everything going up, food and rent, you'll find yourself stressing about how your biweekly salary can cover all your expenses and make your personal finance work. But if you have access to your wage in the toughest of times, you can alleviate that financial stress.
Improves Financial Control
When trying a savings challenge like Cha-Ching, which focuses on bi-weekly savings, it's important to have an excellent budgeting strategy in order to reach your savings target. It should be the priority next to your two weeks' budget. But if an unexpected cost comes up, it's important to have a plan B to avoid compromising your personal finances. And that's what payroll advance can provide—financial control. Instead of skipping on your savings, you can just use your salary advance.
Benefits for Employers:
Improves Efficiency and Productivity
When you give assurance to your employees that they won't need to wait for the next pay period to pay the bills, they'll have an increased morale to perform better. You know how much stress money can give to a person relying on paychecks. Giving them access to their salary when they need it the most can help them have a peace of mind. They'll be more focused on the task at hand, and you’ll be surprised by its positive impact on their performance and productivity.
Reduces Turnover
When workers feel valued for their contributions to the company through various kinds of incentives, such as payroll advances, they're most likely to stay for longer. They'll be more engaged, for they will feel like the company really cares about them. They won't feel abandoned when they're in a challenging situation.
Gives Your Business a Competitive Edge
More than retaining your workforce, you can also attract applicants with this benefit. Not all companies have this privilege. Hence, when a job seeker sees the flexibility in the salary, expect them to hand in their CV.
The Bottom Line
Advance payroll is a great tool for both employees and employers, as it provides greater convenience and financial stability to both parties. With it, employers can manage their budgeting efficiently and build a mutual sense of trust with their workforce, which can result in high employee satisfaction and morale.
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