Salary finance is a new method that allows employees to draw down money from their existing wages.
Salary finance is a direct way for employers to give financial assistance to their employees. This type of product can manifest in different ways, whether it is schemes, cash advances or ways that staff can draw down funds before their pay date.
Salary finance has become an increasingly important employee benefit that is being offered by organisations to their staff, also known as employee assistance programmes (EAP).
In a competitive employer market, companies need new ways to appeal to their staff, keep them motivated, productive and retained. This has typically been things like offering health insurance or vouchers, but today extends to offer financial help too.
How does salary finance work?
Salary finance companies offer a software that is integrated with the organisation and allows staff members to take out money early before their pay date.
For instance, if an employee is getting paid every month on the 28th, but needs to take out money on the 14th, the salary finance product allows them to take out 14 days worth of income. Hence, employees can take out pretty much what they have earned to date.
Salary finance allows employees to earn money in real-time. If they have worked 7, 10 or 20 days of the month so far, they do not have to wait until payday - and instead can take out any money earned so far.
There are a handful of established companies and startups that offer salary finance in the UK and the concept is growing across the US, South Africa and Australia.
How much does salary finance cost?
Although rates vary, there is typically an onboarding or set up fee for the company. Thereafter, companies will pay £1 per employee per month to have access to this facility and the employee will pay around £1.75 each time they make a withdrawal, according to Wagestream. This fee is similar to an ATM fee for when you withdraw money from a credit card or abroad.
Who uses salary finance?
Salary finance has so far been adopted by large employers such as hospitals, the police force, supermarket chains, health clubs and hospitality chains.
Hence, it is popular for employees that may struggle to make it until payday, which may include but not entirely of nurses, supermarket workers, hospitality workers and more.
For large groups of staff that may struggle to make it until payday, salary finance offers a very low-cost alternative to high cost loans or credit card overdrafts.
How is salary finance different to payday loans?
Salary finance allows people to draw down money early from their monthly wages. By comparison, payday loans
allow people to borrow money before their payday and then pay back the loan and interest once they have been paid from work.
With payday loans, the average loans lasts between 2 to 4 weeks and are typically the most expensive loans available on the market, often higher than 1,000% APR.
Over 3 million people in the UK use payday loans to borrow just a few hundred pounds per month, but the high rates can often cause greater financial difficulties and millions have fallen into a spiral of debt as a result.
Salary finance offers a viable alternative and means that employees can have access to money that they have truly earned and receive it sooner than their pay date. Plus, there is just a one-off fee for every transmission, so there are no interest rates or late fees to contend with.
Is salary finance cheaper than loans?
Yes, salary finance is significantly cheaper than using loans, whether it is payday loans, credit cards, guarantor loans or other financial products.
With salary finance, the employer offers you the service and they are fitting part of the bill. You simply get charged every time you want to take money out - and this is usually capped to a number of times per month or a percentage of your monthly income.
Salary finance does not come with interest, late fees, default fees or guarantors - and there is no impact to your credit score either.
How do you stop people abusing salary finance?
If customers are able to draw down money early each month, there is a risk that they get into a habit of constantly taking out money and then they will eventually rely on high cost loans or credit cards to top them up.
Whilst this might be the case, salary finance schemes often come with restrictions that employees can only take out a certain percentage of their monthly salary e.g 40% or they can only take out one transmission every month or couple of months.
As an employee, you can ask your employer to offer salary finance schemes. There are a lot of benefits for employers such as tax breaks and improved motivation, productivity and retention of staff members. Today, employers want to show interest and concern in the wellbeing of their staff and offering financial assistance through salary finance schemes is a good way to achieve this.