What is salary finance and how does it work?
Salary finances is a new system that allows employees to draw down funds from existing wages.
Salary finance is a direct way for employers to support their employees with financial assistance. Although this type of product can look different from company to company, it can be a huge financial support for those who take advantage. Salary financing may take the form of schemes, cash advances or other ways that staff and drawdown funds before their paid day.
For many, salary finance has become increasingly important and the benefit is being offered by more organisations to their staff. In such a competitive employer market, many employers are looking for ways to entice new staff into their companies and keep current staff motivated and productive.
Today, this enticement can take the form of financial support and is designed to be an alternative to employees going into expensive overdrafts or using high cost loans. Salary financing can also be known as employee assistance programs.
How does salary financing work?
Salary financing companies offer software that integrates within the organisation, allowing staff members to take out money early before they payday.
For example, An employee may be paid on the 28th of each month, but they need money on the 20th of the month. Salary finance products would allow them to take a large part of their monthly salary early. With salary finance products you can often take out as much as you’ve earned that month, although each scheme will run slightly definitely.
Instead of always waiting until the end of the month, salary financing employees take out any money they have already earned for the month when they need it. Employees no longer have to wait until payday and can take out any money they have earnt so far.
Who is using salary finance?
So far, salary finance has been adopted by a lot of large employers. Companies such as hospitals, the police force, hospitality chains and supermarkets have invested in this benefit for employees. It is proving very popular in industries where employees often need funds before the end of the month, like those working as nurses or in hospitality.
For large groups of employees who struggle to make it from one page to the next without needing financial support, salary finance is offering a relatively cheap and easy way to solve this problem.
How much does salary finance cost?
Usually, there is a setup fee for companies wanting to take on salary finance, although rates vary. Once the setup fee is covered, companies typically pay £1 per employee per month to have access to salary finance.
On average, the cost of the employee is around £1.75 every time they make a withdrawal.This is similar to the fee you pay when you withdraw cash from a credit card. (Source: TechRound)
Is salary finance different to a payday loan?
Payday loan allows customers to borrow money before their payday and pay it back, with interest, once they have been paid by their work. The average payday loan lasts between 2 and 4 weeks and tends to be one of the most expensive loans available on the market. The APR on a payday loan can often be more than 1,000%.
Although a huge number of people in the UK use payday loans to borrow just a few £100 a month, the high interest rates can often leave people in great financial difficulty. If the loan cannot be paid back as planned, customers often get into a spiral of debt.
In comparison, salary finance is a much simpler alternative. Employees can access money that they have already earned for a small one-time fee instead of borrowing money that they then need to repay. There are no interest rates or late fees when it comes to salary finance, making it a much simpler financial alternative to a payday loan.