Oh no, you cannot make payroll – the position no business owner wants to be in. Not being able to make payroll comes up for a variety of reasons. Some industries have low seasons, receivables may be down, and of course there are down economies. During this time of Covid-19 and the economic repercussions, some industries have been greatly impacted and there has been a sharp uptick in businesses being unable to pay their employees.
When small businesses find themselves in this situation there are some things they can do. Employees and payroll taxes must be paid. Businesses must be creative. It may be time to tap into other resources such as family, friends, or savings. Lines of credit, small business loans, and discounts on receivables can also be considered. Work with your vendors.
If you need money very quickly consider asking a family member or friend for a short-term loan. Do keep in mind that this can put pressure on the relationship. It is especially important that you handle this loan like you would any other. Draft a contract with terms to include payments and interest. Do everything you can to pay back the loan on time or if at all possible, early. If feasible, also consider borrowing from your own savings. Just like with family and friends, have a payment plan and stick with it.
A business line of credit is a valuable tool to use when you are having problems with cash flow. If you do not already have one, talk to your banker about getting one. A business line of credit allows you to borrow up to a certain amount. You then pay interest only on the amount you actually borrow. Once you have paid off what you have borrowed you can borrow it again. This means you can get the cash you presently need and again have it available in the future. You may need to use equipment, inventory, or property as collateral.
A small business loan may be a good option if you feel you are facing a onetime shortfall. Your eligibility for receiving a loan is affected by the age of your business and your revenue as well as your personal credit score. The interest you pay on your loan can be well worth avoiding the penalties of paying your employees late.
Get cash into your business by bringing your accounts receivables up to date. Ask for immediate payment on past-due accounts. You can expedite payments by offering a discount to settle promptly. Discounts can also be offered to current accounts as an incentive for them to pay early.
Hold onto your cash by requesting extensions from your suppliers for upcoming payments. They may be more amenable to this if you have paid them on time in the past. This may enable you to pay your employees. If you get extensions with your vendors have a payment plan and follow it.
Consider selling surplus inventory you might have. You can do this through liquidation companies, eBay, and Amazon. Your profit will likely be less than selling through your normal channels but likely worth it to avoid penalties and expenses of missing payroll.
One final option is using your business credit cards for cash advances. This is an expensive option but is worth considering for making payroll if the other options are not viable or enough.
During these unprecedented times, creative solutions are needed. Different solutions, including a combination of solutions, will work best for different situations and businesses. While the above possibilities may come at a cost, they are typically significantly less expensive than the costs incurred by penalties and legal fees incurred by missing payroll and payroll taxes. Seek expert advice from Shoffner & Associates to figure out the best approach for you and your business for now and in the future.
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Freya Allen Shoffner, Esq.
Shoffner & Associates
Counselors to Small Business and Families.
Give Freya a call at (617) 369-0111 TEXT US (413) 207-6219 or email fashoffner@shoffnerassociates.com
