Last Updated on January 30, 2024
It’s one of the most worrisome questions for employees and company leaders alike: what happens if a company can’t make payroll?
Not paying your employees on-time can have disastrous consequences for your business. This makes figuring out how to get money to pay employees a top priority, regardless of any other factors affecting your business. Here’s what you need to know.
The Importance of Paying Your Employees On-Time
Employees expect to be paid for the work they’ve done for a company. When they were hired, you likely outlined pay expectations in accordance with local payday regulations — such as providing payments every two weeks or twice per month.
Paying your employees means you’re honoring your side of the agreement. You communicate that you value your employees and their contributions. You also ensure that your employees’ financial situation remains stable. With regular, on-time payments, they don’t have to worry about their financial security. Instead, they can focus on giving their best effort at work.
Paying your employees on time isn’t just the ethical thing to do — failure to pay employees can have serious consequences.
The Consequences of Missing Payroll
Missing payroll consequences can be far-reaching and devastating for your business. While delaying payments can technically be done, it can seriously hurt your relationship with employees. The financial pressure that they experience from late payments will likely cause them to seek employment elsewhere.
Failure to pay wages or remit payroll taxes over an extended period of time can also result in fines and other legal action. Unpaid payroll tax penalties can be assessed on top of the deposits you already owe, further adding to your financial struggles. And disgruntled employees could file a legal claim for their unpaid wages. They will often need to be paid interest and an additional penalty payment on top of their regular paycheck that wasn’t paid on-time.
Poor employee retention can further increase costs for your business through lost productivity and the expenses associated with hiring and training a replacement. High turnover can also hurt your workplace culture, making it even harder to attract and retain top talent.
Failure to make payroll can quickly snowball into even more severe outcomes for your business.
Reasons You May Need Help With Payroll
Not being able to make payroll is a serious concern for business owners that largely comes down to cash flow problems. There are several cash flow issues that can leave a business struggling to make payroll.
For example, delayed customer payments can put significant strain on a business’s financial situation, even when they are managing their finances wisely. Other factors outside of a business’s control could include increases in material costs or inventory obsolescence. Increased expenses or reduced income can make it much harder to make payroll.
Of course, a business’s own activities can also make payroll a challenge. New projects and products that require substantial investments can create problems if you don’t have a financial safety net in place — especially if these projects experience delays or other cost-related issues.
Seasonal businesses can also have a harder time making payroll, as periods of large cash inflows and outflows followed by periods of minimal business activity can make it harder to manage capital effectively. This could even result in periods of negative cash flow during the off-season.
Ultimately, finding ways to improve cash flow is essential so that payroll struggles don’t become a recurring problem for your business.
What to Do If You Can’t Make Payroll
If you’re worried about how to get money for payroll, you have several solutions available. Even when cash flow trouble exists, proactive planning will ensure you can make payments on-time.
Solution #1: Invoice Factoring
Invoice factoring, also referred to as payroll funding in the staffing industry, is an excellent solution for how to pay employees when you are low on working capital. With this solution, businesses sell their unpaid invoices to a factoring company, which advances 80% to 90% of the invoice’s value.
The original customer would then submit their payment for the outstanding invoice to the factoring company. Once that payment is made, the factoring company releases the remaining value of the invoice to you, minus their service fee.
With invoice factoring, you get instant cash without taking on additional debt or having to wait for slow-paying customers. Additionally, approval tends to be much easier than trying to take out a bank loan. This can provide a sudden influx of cash without needing to hunt down client payments.
Similar to invoice factoring, some companies will offer early payment discounts to their clients to convince them to submit payments promptly. Late payment fees can also encourage clients to pay on-time so that delayed invoice payments don’t create payroll issues.
Solution #2: Payroll Loans
Payroll loans are typically provided to businesses as either a cash advance or a line of credit. With a cash advance, businesses are provided a lump sum of money upfront, which they can use to cover payroll and other necessary expenses. The business must then repay those funds (with interest) by an agreed-upon date. These loans usually feature fixed payments, allowing businesses to plan for them as part of their monthly budget.
A business line of credit operates similar to a credit card. Businesses can borrow money up to a set amount and make repayments (once again, with interest) to lower their balances. With a line of credit, you can withdraw and pay back money multiple times, as long as you don’t reach the limit of your available credit.
Both of these payroll loan solutions can help businesses cover payroll expenses with relatively quick access to cash. Unlike with invoice factoring, these loans enable businesses to keep 100% of the revenue they are owed from unfilled invoices.
However, the loan approval process tends to take longer than invoice factoring, usually requiring a credit check. These loans often have strict repayment requirements and high interest rates. The long-term costs associated with interest fees can be much higher than revenue reductions from invoice factoring. Failing to repay these debts in time can also hurt your credit score.
Related: Payroll Loan vs. Payroll Funding
Solution #3: Review Accounts Payable
You can’t delay payroll — but you may have some room to negotiate on your current accounts payable. You might need to wait until the end of the payment term deadline to submit a payment to a vendor. Or, you might need to reach out to a vendor to negotiate a longer payment term. Waiting to fulfill accounts payable instead of paying a vendor right away could help you make payroll as it would allow you to have cash available for a longer period of time.
With cash flow forecasting, you can better evaluate how accounts payable relates to your payroll responsibilities. Combining this information with estimated incoming payments will help you plan and budget appropriately.
Solution #4: Liquidate Assets
Though this may come across as a more extreme solution, businesses can liquidate some of their assets to get cash so that they can make payroll. Generally speaking, this could include assets that are no longer used or wouldn’t disrupt your core business operations if sold, including raw materials, existing inventory, and even office equipment, machinery, or manufacturing supplies.
Businesses must be careful to not liquidate more assets than necessary, as this could make it harder for the business to operate.
Missing Payroll FAQs
Is it illegal to pay employees cash?
You can still pay your employees in cash, as long as you still comply with IRS requirements and take out appropriate deductions for each employee. To legally pay employees in cash, you must keep detailed payment records, follow a regular payment schedule to ensure accurate payments and stay compliant with state payday laws, and pay all applicable taxes. You should also get an acknowledgement of the cash payment from your employee (such as by having them sign a salary receipt).
Is it illegal not to pay employees?
Yes. Employers are not allowed to withhold or deduct payments from their employees, except in situations required by law (such as FICA taxes or wage garnishment). This is true even if the company is experiencing cash flow problems. Failure to pay employees is considered wage theft. Employees can sue for compensation, and businesses will usually be subjected to fines from civil penalties, as well as court-ordered damages.
What happens if a company misses payroll?
Missing payroll (and the associated payroll taxes) can result in significant financial penalties under the Fair Labor Standards Act (FLSA). Businesses will often face a variety of penalties and fines if they miss payroll. In addition to paying the unpaid payroll, employers are often required to pay interest or a multiplier to their employees. They will also be subjected to IRS fines. Employees can even take legal action against the business to claim their unpaid wages.
How can I get money to pay my employees?
Proactive steps can ensure you have a legitimate answer to “How to pay my employees,” even when you’re experiencing cash flow issues. Invoice factoring can help you get cash for unpaid client invoices. You could also take out a business loan or line of credit. In an emergency, you could even sell business assets or draw from your own personal finances.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.