Salary advance: how it works and what you need to know

Work is not just about 9-to-5 tasks, calls, and meetings. Sometimes, other matters are at hand, and you need to be aware of your options. For instance, you may need to receive your salary earlier to pay for unexpected expenses. It is what a salary advance is used for.

Still, salary advances have benefits and drawbacks. This article will explore the pros and cons of a salary advance request and explain how it works. 

What is a salary advance?

A salary advance (sometimes called payroll advance) refers to a situation when a business allows its employee to receive a portion of their future earnings ahead of the next payday after the employee provides a reason for the advance. 

The need for a salary advance usually occurs when a staff member needs money urgently due to financial pressures or an urgent expense. For instance, if an employee suddenly has a medical emergency and has to pay a substantial medical bill as soon as possible. Thus, they decide to tap into their future salary.

However, the situations may differ. According to EY’s 2020 report regarding on-demand pay, financial stress is a regular occurrence for 70% of individuals in the UK and US. The most common reasons for these issues are emergencies, insufficient savings, and mismatches between income and expenses. 

It’s important to note that a salary advance is not something an employee earns additionally but a sum paid from their future salary. Also, the provisions and rules of salary advances depend on employer policies. 

There are differences between a payroll advance and a payday loan. Let’s compare the two:

Points of comparison	Salary advances	Payday loans
How it is provided	A salary advance is provided by the employee’s company.	Such loans are offered by a lender or a loan service.
Do you need to return the funds?	No, as a payroll advance comes directly from an employee’s next paycheck.	Yes, this is typically a short-term loan that needs to be returned.
Does it impact your credit score?	No, they do not impact your credit score.	Yes, a loan can impact your credit score if you don’t return funds on time.
Are charged interest/other fees included?	No, employers usually don’t charge interest.	Yes, some loans may have high interest and other fees the business imposes.

How does a salary advance work?

You might consider getting a salary advance to pay for something urgently at some point in your career. Employers that offer payroll advances to their employees have different policies for this financial matter, but generally, you can expect the process to go like this:

Determining the employee’s eligibility. To get a salary advance, a person usually must work full-time and have been with the company for some time (typically over 6 months). The advance access depends on the staff member’s overall performance and justification for getting a salary advance. 

Application request for the salary advance. Once you know you’re eligible for the advance, you can request the application form. You will fill out the amount you need and the reason for the payroll advance. After you’re done, submit the application. 

Approval process. The HR department usually reviews the application form before giving employees access to salary advances. Once they decide on your request, they will share the details with you, and the day you will get paid the salary advance.

Repayment terms. Lastly, the employee will be notified of the repayment terms. Meaning, how much and when the money they requested will be deducted from their next salary. 

Benefits of a salary advance

Getting a salary advance can benefit employees immensely, especially at times when you need money to pay for something important. Let’s take a look at some of the benefits. 

Immediate access to funds

In many cases, salary advances are pretty fast: many companies provide them to employees the same day or within a couple of days after the application is filled out. It is crucial for cases when you need funds for an emergency.

Flexible repayment options

Many employers who offer salary advances also provide flexible repayment options so that their staff have different repayment terms that fit their financial situation. This might include deductions spread over several paychecks rather than a single lump sum, making it easier to manage cash flow post the advance.

Lower interest rates compared to payday loans

As we mentioned before, other loan options you may consider usually come with high interest rates and strict payment deadlines. Meanwhile, salary advances usually don’t require a staff member to pay any interest, as the money comes from their next paycheck. 

Emergency financial relief

Lastly, a salary advance can alleviate financial stress during unexpected expenses, such as medical emergencies or critical home repairs. It provides a safety net that can prevent the need for higher-cost loan options from a credit card or a loan service.  

Risks and drawbacks of salary advance

Still, you also need to know about the potential issues that salary advance schemes may have so you know how to deal with them. 

Risk of debt cycle

Although salary advances can come in handy, relying on them all the time can be very damaging. You can develop a dependency on advances, resulting in unstable future income. Make sure to plan ahead and establish savings and expense plans to monitor and stabilize your finances. 

Fees and interest charges

Although these are rare cases, some employers might still impose nominal fees or interest on advances. These costs, while small, can add up, especially if an employee frequently requests advances from their business.

Impact on future paychecks

Your paycheck after you’ve taken a salary advance will be smaller. This can be fine for a one-time occurrence, as you can repay it and budget the remaining funds for future expenses. But, if salary advances become common for you, you can get into a cycle of needing additional advances to pay for bills and daily necessities.

Salary advance provider restrictions

In this case, a salary advance provider refers to an employer that provides such advances to its employees. Not all employers offer salary advances, and those that do may have strict guidelines regarding how often an advance can be requested and what is the maximum amount. The restrictions imposed by salary advance providers can limit an employee’s ability to access funds when needed.

Eligibility and requirements

Here’s the list of the most common eligibility markets that get brought up by a salary advance provider (the employer):

• Employment status. The employees usually need to work full-time for their employer and be on permanent contracts to access a salary advance scheme. Advances to part-time employees are less common. 
• Length of employment. The longer employees work for a current employer, the higher the chance they will get a salary advance scheme. The policies of a salary advance provider can differ regarding the employment timeframes: it can be from 3 months to a year. 
• Income and salary specifications. Some employers might set a minimum salary threshold to qualify for an advance.
• Credit check. In some cases, an employer offering salary advances might conduct a credit check to assess the financial responsibility of the employee before allowing a salary advance scheme. 

How to apply for a salary advance

Here are the steps an employee will need to take to apply for a salary scheme:

1. An employee needs to find out if their employer is offering salary advances and what are its policies regarding those: who’s eligible for it and other conditions;

2. Contact your HR department to find out the details about your employer’s salary advance schemes and what documentation employees need to apply for it;

3. Pay close attention to the conditions, including the sum you will be getting and how it will influence your next income;

4. Complete the application form and submit it to your HR department;

5. Receive the salary advance.

Legal and regulatory aspects for salary advance providers

Generally, the regulations regarding salary advances differ a lot from country to country and even state to state. 

For instance, the UK recently made it easier for employers to handle payroll when giving salary advances. Now, employers only need to make one full submission each pay period, regardless of whether a salary advance is included. 

Overall, such regulations require transparency from employers when it comes to disclosing details about said advances to employees. 

It is always better to do your own research on your country’s and employer’s policies regarding salary advances for employees. 

Tips for managing a salary advance

If you want to access a salary advance, you need to consider how you will handle and manage the money.

1. First and foremost, thoroughly read the terms and conditions of any salary advance schemes. Make sure that you can adhere to the terms and agree with them.

2. Do not rely on salary advances too much. Yes, emergencies happen, but if you request a salary advance too often, you risk developing an unhealthy dependency on these. Consider establishing long-term budgeting strategies to improve your financial situation.

3. You will also need to plan out your next steps after getting the salary advance—how it will influence your next paycheck and whether you have enough money for your monthly expenses. If necessary, budget your expenses according to your cash flow. 

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Conclusion

A salary advance can be a valuable financial tool for employees facing urgent financial needs, offering immediate access to funds, flexible repayment options, and lower interest rates compared to other loan options. However, it is essential to be aware of the potential risks, such as the possibility of a debt cycle and the impact on future paychecks. Employees should consider implementing budgeting and planning strategies to manage funds properly before they even access payroll advances. 

FAQs

How quickly can I receive a salary advance?

The speed at which employees can receive salary advances depends on payroll-related policies of the employer. Typically, it can take a couple of days, or the finances can even arrive on the same day if the situation is urgent. You can talk about the timeframes with the HR team.

What happens if I cannot repay my salary advance on time?

In such cases, employers may allow for an extension or set up a revised repayment plan that fits the employees’. However, if an employee has consistent issues with repayment, it can affect their eligibility for future advances. In separate cases, they can be heavily penalized and lose certain privileges.  

Can I get multiple salary advances?

It is up to the employer to decide how many salary advance schemes can be applied to one employee and how many advances they can get throughout the year. Usually, these rules are disclosed in employers’ policies regarding the issue on the internal website of the business.