What is a pay advance?

Many people are in financially unstable situations. A key reason is because 63% of Americans live paycheck to paycheck. The reality is there’s not a lot of room left over for anything else, especially savings or funds for a financial emergency. 

Without consistent pay—which many wage workers face if schedules change week-to-week—there is a significant financial impact. According to a Morning Consult survey on employee paycheck experience, 80% of respondents said that if they had $500 or more missing from their paycheck, they’d have trouble keeping up with bill payments. 

Financial stress isn’t news. With rising costs, many folks find themselves feeling the squeeze on their money. In ZayZoon’s state of employee financial wellness report, of the 5000 employee respondents, 35% noted they were stressed daily about their finances. 

People will often turn to nefarious financial solutions—perhaps putting themselves in more debt for short-term gain like payday loans. However, there are a few, more favorable options available to employers and employees. One of those is a pay advance. 

Employees sometimes ask employers for support with a short-term loan by way of a pay advance. Also known as cash advances, pay advances have been a key way for business owners to support their employees. But they aren’t without their challenges, including administrative labor and potential cash flow issues.

Ahead, we’ll break down what a pay advance is, including its challenges and benefits, and what other solutions you can offer your employees, like earned wage access (EWA). 

What is a pay advance? 

Pay advances are a short-term financial solution provided by employers as part of a paycheck advance in a pay period. 

This loan type allows employees to borrow money against future earnings, accessing it before their next payday, and has to be paid back to the employer.

But pay advances may come with terms and conditions, depending on the business and their own specific rules, are often labor intensive administrative work on the part of the employer, and they do have some limits on what’s allowed legally. For example, businesses may charge administrative fees to get the pay advance completed but can’t make any interest off the repayment. 

Pay advances, as well, are time-consuming, often manual processes. Sixty-two percent of the HR professionals surveyed for ZayZoon’s state of employee financial wellness report noted that manual pay advances are somewhat to very time-consuming. 

Why would a business offer a pay advance to employees? 

Pay advances aren’t meant to replace regular income. It’s an option largely for a financial emergency only.

Offering pay advances is not legally any sort of requirement, but more of a choice. Many small businesses can elect to offer this to employees to signal that they take their financial well-being into consideration. Having this option available may boost morale, increase productivity, and even help attract and retain talent. 

As an employer, being there for your employees during a financial crunch is invaluable. It fosters loyalty and can improve the overall work environment. Pay advances are helpful to employees but there are less manual and labor heavy solutions available to employers. 

What are the different paycheck loan types available to employees? 

Beyond what employers can offer from their business to employees, there are a couple of other pay-adjacent loans for employees. 

Employee loan

A personal loan from an employer to the employee paid back in installments from future paychecks.

Payday loan

A short-term loan provided by payday lenders with high-interest rates. Payday loans, provided by banks or independent lenders, often come with annual percentage rates (APR) of 300-500%, largely due to high-interest rates. This may lead to employees getting stuck in a cycle trying to pay back debt.

In the U.S., nearly 12 million people use payday loans, with fees reaching over $9 billion. Because of the added fees and high interest rates, payday loans are far harder to stop using, enabling employees to get into a cycle of debt.

Remember, offering pay advances should align with your company’s financial objectives and policies. 

That said, there are other options available for businesses that don’t take the same kind of set-up and monitoring. 

Earned wage access (EWA) as a pay advance solution

The reality is that employees who need a cash advance feel shame around asking an employer for a loan but feel there are no other options. 

However, there are other options available to employees: earned wage access (EWA).

Earned wage access, which is sometimes called on-demand pay, is a way for employees to similarly access part of what they’ve already earned in wages or salary but without having to borrow from the business. EWA providers such as ZayZoon offer employers free set-up and access to the tool, and only require a small transaction fee should an employee take out up to $200 of their pay ahead of time.

EWA provides employees with immediate access to their earnings—ZayZoon e-transfers can be completed in minutes. This also eliminates risk for employers, meaning they don’t need to worry about employees not paying them back, overusing a loan from the business that cash flow becomes an issue, or determining repayment terms. 

Businesses can offer this benefit without straining their resources or cash flow by partnering with a third-party EWA provider.

The benefits to your business go beyond doing the right thing for your people. Some of these include:

• Low lift: EWA is a plug-and-play solution, and setup can be as short as 30 minutes.
• Low risk: EWA providers take on the risk themselves, protecting your business, and it’s low-fee with no interest.
• Integration with payroll: EWA providers integrate with your payroll system, so you don’t need to manage the advances.
• Zero cost: Offering EWA costs a business nothing.
  
  

Benefits and challenges of pay advances 

Pay advances, unlike payday loans, do offer better flexibility for employees. That doesn’t mean they aren’t without their challenges, though, and it’s worth measuring the risk of offering a pay advance versus other payday options, such as earned wage access (EWA). 

Consider the following benefits and challenges:

Benefits

• Strengthens rapport with employees
• Employee benefit 
• Supports employee mental health and wellness
• Helps improve employee morale and productivity
  
  

Challenges

• Added policies to create and enact
• Compliance and legal risks because of payroll rules and regulations
• Added administrative work for a small business
• Potential cash flow issues, such as taking money in advance to pay employees while struggling to pay for other necessary expenses

Offering pay advances has other risks like not being properly set-up through a business’s payroll system, how to do taxes on the earned amount as a loan, and more. Moreover, what if the employee no longer works for you but you still need to collect on what they owe? 

Pay advances for SMBs

The risks and considerations associated with pay advances vary based on the size of the business. Larger enterprises often have more financial capacity. They can absorb the potential risks associated with this practice.

For SMBs, it is crucial to consider the financial and labor capacity of the business to offer pay advances. Establish clear guidelines to manage the risk effectively, including monitoring bank accounts. Consider also having a separate credit limit to manage the ebbs and flows of this offering.

Are pay advances right for your business?

Whether or not a pay advance is right for your business is entirely up to you. There are many options to consider, such as the financial implications of running payday advances. Ask yourself if you have the capacity to manage the program. Research any legal and regulatory requirements because payroll and pay issues can vary state-by-state.

How EWA works at ZayZoon 

Financial wellness is essential. More and more, employees are looking for jobs that offer a more holistic approach to their benefits and well-being beyond health. Employees who use ZayZoon have reported an increase in their ability to work. In ZayZoon’s report on how to motivate employees, 42.5% of respondents said that access to EWA significantly improved their financial well-being and decreased their overall financial stresses. 

Mental and physical health can be significantly depleted by financial loss and stress. To remain competitive in the job market, consider offering EWA in your overall benefits and compensation package.

ZayZoon offers more than immediate cash for employees. Some users find perks such as gift cards and the gas card more helpful because it targets what they need most and offers more money with a 5% top-up. 

Employee pay affects or benefits nearly every part of their life. It can also make for better, happier, and more productive workers. Businesses that offer ZayZoon earned wage access have shown a 29% reduction in turnover. And they get 2x more applicants than they did before offering EWA.

If you want to learn more about financial wellness programs and EWA or how ZayZoon can empower your employees, book a demo.