It’s a business owner’s worst nightmare: You can’t pay the employees who count on you to meet their own financial obligations. Often this is a sign of a business in trouble, but sometimes it’s due to a lot of overdue accounts receivables, a large inventory purchase, or a seasonal decline in business. But whatever the cause, it’s necessary to take immediate action if you find yourself in this position.
Possible legal issues
In addition to disgruntled employees, not making payroll may expose you to some legal risks. Here are some of the issues to be aware of:
- An unpaid employee can file a state wage claim against you. Each state has different laws, so you should familiarize yourself with yours. Check out this list of wage and hour district offices by state [PDF].
- The Fair Labor Standards Act (FLSA) requires that you pay non-exempt employees at least minimum wage and overtime each week. Violating this law could bring penalties from the Department of Labor.
- If you’re behind on payroll, chances are you’ve also fallen behind in your quarterly payroll taxes. You’ll need to catch those up, too, or the IRS may impose penalties and fines.
8 ways to raise money fast
In addition to having legal problems, if your employees aren’t paid, they may become disgruntled or even use it as an excuse to slack off and not complete their work. To keep your business flowing smoothly, you should do all you can to pay your employees. Here are some ideas to create some cash flow quickly.
- Collect what you’re owed. Make a concentrated effort to collect all accounts that are past due. Call all clients with a past-due balance and ask them to pay it. If you don’t have success with this, offer a discount to those who will pay immediately. In a time-sensitive emergency, you can ask them to wire you the money.
- Collect what you’re not owed — yet. If you have account receivables from loyal clients who always pay their invoices on time, contact them and offer them a discount if they will pay early.
- Sell your accounts receivable. For the clients who can’t or won’t pay, sell their invoices to a factor. You’ll only receive a percentage of the amount owed, depending on how past due the invoices are, but it will put cash in your hands quickly. Find a factoring agency near you by consulting this list of factoring companies by state.
- Turn credit lines into cash. If you have a line of credit with your bank or on your business credit card, now is the time to use it.
- Borrow from friends and family. You won’t have enough time to apply for a traditional bank loan or line of credit, but asking for a loan from friends and family is a quick way to get a cash infusion. To prevent problems in the future, be sure to treat it just as you would a formal loan. Create a contract that outlines the terms you agree on.
- Look at alternative funding options. There are many new types of loans that are faster and easier to obtain than bank loans. For instance, a merchant cash advance is given against your future credit card sales, and a micro lender makes loans for smaller amounts than a traditional business loan, starting at just $1,000. LendingClub, Kabbage, and Prosper make these types of loans.
- Liquidate your surplus inventory. If you have surplus inventory, you can quickly liquidate it and get a cash infusion by either selling it online at places like eBay and Amazon, or contacting a liquidation company. You won’t earn the same profit you would selling it at retail, but it will put cash in your hands quickly.
- Contact your suppliers. You likely buy from the same suppliers on a regular basis, and have built a good working relationship with them. Contact them and ask for a short-term extension on your payment terms, and use the money you would have paid them to pay your employees.
If all else fails
Sometimes, you do all you can and still can’t find a way to pay your employees. If you find yourself in this situation, here is some advice to make it as painless as possible.
- Communicate with them. No one wants to be told 10 minutes before they expect to get their paycheck that it’s not coming. Instead of waiting until the last minute, be honest with your employees as soon as you know there is a problem, and let them know that you are trying to work it out.
- Take a pay cut. As the business owner, you should forgo your own paycheck and put that money toward paying your employees. This will not only give you some cash to work with, but will show goodwill on your part that will hopefully encourage them to rally around you and the business. If you have high-ranking executives working for you, talk to them about receiving their pay a few days late so you won’t have to miss paying the lower-level employees.
- Cut hours or positions. If you’ve taken all the steps you can, and there is still no way to make payroll, you may need to let some people go or cut back employee hours. According to the Department of Labor, this won’t relieve you of paying them for the hours they worked, but it may help with cash flow until you can get your business back on its feet.
Good employees are key to a thriving business, and that’s why it’s important that you do all you can to ensure that yours are paid on time. Once you get through a cash flow shortage, it’s a good time to take a hard look at your business’s operating model and make changes so it doesn’t happen again.