Should small businesses offer a salary advance scheme?

Employers may be wondering how they can support their people as the cost of living soars and incomes are squeezed.

And with big firms like Tesco advertising a salary advance as an alternative to high-cost debts, this might sound like something you want to offer your staff.

But what is a salary advance?

Giving your staff access to their salary early can be helpful for managing unexpected costs, but it needs careful consideration.

Here, we explore how salary advance schemes work, and the risks and benefits of setting one up for your small business.

What is a salary advance?

A salary advance is a way for employees to get some of their earned salary early.

Employers have an agreement with a third-party provider that can give people a short-term loan before their next payday – this is known as an Employer Salary Advance Scheme (ESAS).

Each transaction usually comes with a £1 to £2 fee, which comes out of the employee’s next paycheque.

These schemes are designed to cover unexpected costs before the next pay day, but their popularity increased during the pandemic as people looked for ways to manage their finances.

How does salary advance work?

If you want to offer a salary advance scheme then you’ll need to set up an agreement with a provider, such as Salary Finance or Revolut.

There’s no cost to you as a business, but employees usually have to pay between £1 and £2 each time they draw down their wages.

The table below shows how a salary advance scheme would work for your business and your employees.

Your business	Your employees
Register with an independent ESAS provider to offer a scheme to staff	Sign into the service (often managed through an app or online) to view how much of their salary they can access early
Pay the employee’s salary balance (minus any transaction fees for using the scheme) on the normal payday	Choose how much of their earned salary they want to be paid in advance – this is usually capped at 50 per cent*

*Earned salary (or earned wage) is the pay they’re owed for days already worked in that week or month before payday.

Risks and benefits of using a salary advance scheme

Here are some of the risks that come with salary advance schemes:

• they aren’t regulated in the same way as other loans and borrowing so credit checks don’t apply – this means affordability is down to the person using it and can lead to financial difficulty
• the fixed transfer fee makes it difficult to compare the cost with interest on a loan
• they aren’t designed for regular use – frequently using salary advance could lead to people running out of money between paycheques

The Financial Conduct Authority (FCA) has said: “The FCA does not usually regulate ESAS as an early advance of salary provided by an employer does not involve the provision of credit, but they can raise similar issues.”

Read the FCA’s statement to understand more.

That said, these schemes can be useful for people who need to pay for something in the short-term. For example, if their boiler breaks and they need to cover the cost of a new one before the next payday.

These advance salary schemes can be a more affordable alternative to payday loans and credit cards.

As an employer and small business owner, make sure you:

• inform your staff about the potential risks of using the scheme

• watch out for underlying financial problems – signpost staff to financial support and charities like Citizens Advice if you’re worried they’re struggling
• pay your staff fairly so that staff aren’t using the scheme to make up for poor wages

Meanwhile, HR magazine People Management has interesting insight from professionals in the field if you want to learn more about the pros and cons of offering a salary advance scheme.

Alternative ways to reward your staff

Offering a good benefits package is one of the best ways to keep staff motivated – and attract new people to join your team if you’re hiring.

You could consider:

• offering flexible working
• developing a reward scheme
• focusing on employee retention and career development

More guides for employers and small businesses

• Cost of living support and resources for small businesses
• HR toolkit – what HR tools do growing businesses need?
• How to write a staff handbook
• Appraisal form template
• What does employers’ liability insurance cover?

This article is intended as a guide. If there’s anything you’re unsure about, make sure you get advice from a finance professional. Money Helper has advice and resources to help with managing finances.

Do you offer a salary advance scheme in your business? Let us know your experience in the comments.

Photograph: Prostock-studio/stock.adobe.com