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.
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 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.
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.
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.
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.
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.