During times like we’re experiencing right now, making payroll can sometimes be a challenge. When I took my turn as a small business owner several years ago, I felt like paying my employees was at the top of the priority list—before paying suppliers, meeting other obligations, and paying myself. Fortunately, those times when I needed a little extra cash to meet payroll were rare (but they did happen).
A lack of sufficient cash flow has rung the death knell for many small businesses over the years. Poor cash flow can even plague otherwise profitable businesses, so even if you have a healthy customer base and good revenues, there may be times when you’ll need to augment the cash you have available with borrowed capital to meet expenses. With that being said, if meeting payroll is a chronic challenge, your cash flow problem could require a deeper dive and a conversation with your accountant to determine what you can do to remedy it.
Borrowing to Meet Payroll
If you were in business in the years following 2008, you probably remember how difficult it was for small businesses, especially the smallest small businesses, to borrow. Although there is capital available for creditworthy borrowers today, many lenders have tightened their creditworthiness criteria or stopped lending altogether in much the same way they did then.
Financing payroll is an expensive proposition and should be approached with caution because it can be expensive. Additionally, meeting a payroll hiccup is usually a short-term challenge, so I recommend turning to short-term solutions. For example, a small business loan with a term of four or five years to make payroll might not make sense. The accrued interest will make your payroll prohibitively expensive and encumber even more cash flow to satisfy the periodic payments each month.
With that in mind, here are 4 ways you may be able to finance payroll when cash flow is tight.
A Business Line of Credit
A business line of credit is the perfect tool for meeting a short-term, or occasional, need for some extra cash. For creditworthy borrowers they are available through both traditional lenders (like banks and credit unions) as well as online lenders. You can access the credit line when you need it, repay the funds, and use them again throughout the term of the credit line. Additionally, you only pay interest on the amount of credit you use, making a line of credit one of the most flexible tools a small business owner can use to quickly access borrowed capital.
A Short-Term Small Business Loan
Short-term financing with terms of 3- to 12-months can be a good way to meet a short-term need for extra cash. The shorter term allows you to get in and then get out of the financing relatively quickly. The online lenders that offer short-term financing usually can give you an answer on your loan application the same day and can have funds in your account within a day or two.
As a rule of thumb you should be aware that the shorter the term of the loan the higher the periodic payment will likely be, but the overall dollar cost of the loan could be lower because of the shorter time frame for interest to accrue. You should also expect to pay higher APRs than a more traditional loan with a longer term, but the quick access to capital and the shorter term could make the total dollar cost less and make more sense to address a shorter-term need for extra capital like meeting payroll.
In addition to a more traditional-feeling short-term business loan, there are also alternative loan options that include merchant cash advance or factoring that are also shorter-term in nature, but come with a premium cost.
Business Credit Cards
According to The Tokenist, “10 years or longer is the time 10% of Americans say it will take them to pay off credit card debt, and 9% don’t think they’ll ever be completely free of it.” For this reason, business credit cards are only advisable for use in funding short-term costs. A business credit card can be a good way to finance a short-term need like payroll. Although some of the major credit card providers have tightened their credit criteria for new applications, if you have reasonably good credit, there are still providers willing to work with you and your small business. And, like a line of credit, you can access your available credit and repay it quickly—enabling you to use that credit again when you need it.
Free up Cash From Other Sources
- If you are anticipating an equipment purchase in the near future and were planning on paying for it with cash, it might make more sense right now to borrow or lease to make the purchase, so you can free up the cash you intended for the purchase to meet unexpected expenses like a payroll shortfall. In recessionary times, protecting as much cash as possible to meet short-term needs for capital, like payroll, can be a good strategy.
- Never underestimate the power of payment terms from your suppliers. 30- or 60-day terms for paying for inventory or supplies can free up cash for other expenses. It’s not uncommon for vendors to offer their good customers payment terms, and because many suppliers offer a discount for paying early you could potentially gain extra cash by taking advantage of those discounts. Over the years I’ve known several small business owners who take a serious chunk out of their payroll with the 10% discount they get from their suppliers for paying their 30-day invoice in 10 days.
- Staying on top of your Accounts Receivable is the single most important thing you can do to ensure you have adequate cash flow. In my business, my margins were thin enough that I started losing profits if a customer took 45 or 50 days to pay their invoice. If they took 65 days, all my profits were eaten up in the drag it caused to my cash flow—and any longer than that it was costing me money to do business with them. Collections aren’t fun, but should be a daily exercise to make sure you can protect your cash flow. There was even a time or two when I needed to make personal phone calls or in-person visits to customers to get enough cash to meet a payroll obligation coming up in a day or two. Most of my customers were understanding and yours likely will be too.
Making payroll when cash flow is tight is incredibly stressful. Most of the small business owners I speak with regularly have experienced a time or two when they had to jump through hoops to come up with the cash so their employee’s paychecks didn’t bounce. Financing payroll is never the first choice, but in those situations where it’s necessary, there are options.
About the Author
With over 35 years in the trenches as a Main Street business evangelist, author, and marketing veteran, Ty Kiisel makes the maze of small business finance accessible by weaving personal experiences and other anecdotes into a regular discussion of some of the biggest challenges facing small business owners today.