Making payroll isn’t always easy for small businesses. Customers don’t always pay invoices on time, surprise expenses pop up frequently, and seasonal cycles can make it tough to always have money at the ready to pay your staff.
But nevertheless, your staff expects to get paid regularly, and it’s up to you to figure out how.
Thankfully there are business loans out there to help you cover payroll when cash flow is low. Many lenders offer a variety of products that make it easy to cover cash shortfalls, so you can guarantee that your team gets paid.
Some loans focus directly on helping you make payroll, while others help you stabilize your cash flow. But no matter which loan is right for you, each can help you cover payroll during lean times, and keep your business humming.
Cash flow isn’t just the amount of money on hand at any given day, it’s the lifeblood of your business. In fact, positive cash flow goes way beyond merely being able to pay staff: in fact, it can help you determine the overall financial health of your company as well.
In short, cash flow is the amount of money going into and out of your business in real-time. This makes it different than revenue forecasts (which look at anticipated earnings) and profit-and-loss statements (which provide a retrospective on where you made and spent your company’s money). Cash flow is akin to your company’s heartbeat: it should be regular, and it helps keep your company’s lifeblood circulating.
Cash flow issues are a much bigger problem than not being able to pay staff. If your company has cash flow problems, you might also have too much overhead, not enough products, or are wasting money somewhere within your operations. You can forestall larger financial problems by paying attention to cash flow on a frequent basis. And, in turn, can avoid low periods that might make it hard to pay your staff.
Related: Taking charge of your company's payroll doesn't have to cost a fortune. Check out the best free payroll software for small businesses.
Get a Business Line of Credit
Best for: Established businesses.
Even the best accounting can’t always prepare you for down months, or unexpected expenses. Short-term loans are often expensive and come with stringent repayment schedules that could even require you to make daily payments on your loan. If your cash flow isn’t too hot, you’re not likely in a position to make these loans work to your benefit, either.
This is where a business line of credit comes in handy. A business line of credit provides companies with a pool of funds from which they can withdraw as needed. You only pay interest on the money you’ve withdrawn, which means that you don’t have to pay interest on funds you don’t need. You’re not restricted to certain uses for the money you borrow, either. This means you could dip into your line of credit to cover payroll just as easily as you could buy inventory.
A business line of credit is great for well-established companies with good credit. Newer companies, or those without good credit, may have a hard time getting approval due to the nature of how these products work. The lender takes on significant risk when assuming that you’ll be able to pay back the money you’ve borrowed on a repeat basis, which can make a business line of credit harder to get.
Best for: Companies with an irregular cash flow.
Invoice financing can be an easier option for most small business owners than getting approved for a business line of credit. You don’t need to have exemplary credit, nor do you need a long credit history, to get one. All you need are existing unpaid invoices.
This option doesn’t have the same requirements as a typical loan. Lenders will give you an advance on a percentage of the total amount of your invoice, which is usually around 85%. Your lender then holds onto the remaining 15%, and will charge you a fee based on the percentage of the funds you’ve received until the invoices are paid. At that point, you’ll get the remaining 15% back.
Invoice financing provides a great, quick way to put your outstanding invoices to work for you. You’ll be able to pay your employees without having to wait for your clients to pay you first. This can help you normalize your cash flow if clients pay irregularly, or if you’re in an unexpected bind. Note that invoice financing won’t be cheap: you can expect to pay a factor fee of 8-30%, which makes them less cost-effective than a business line of credit (but more available and expedient).
Best for: Those who only need a one-off solution
If you can’t get approved for a business line of credit, and don’t have invoices to use for financing, you can always opt for short-term loans to cover payroll. Short-term loans are particularly helpful if you’re in a one-off cash flow crunch, rather than a recurring situation with covering payroll expenses.
Short-term loans provide you with the cash you need faster than either of the above two options. Lenders typically approve applicants within a few hours, and you can usually have the cash in hand within the same day. The expediency of short-term loans makes them uniquely suited to help in emergency situations, or to cover big-time expenses when nothing else can.
A word of warning, though: Short-term loans are expensive, and you’ll have to pay them back quickly. Most require repayment in less than a year. More often than not, the terms are even shorter. You might even have to make daily repayments on a short-term loan, depending on what your lender offers you. And if you do, that means you might find yourself right back where you started in terms of cash flow problems.
Next steps to cover payroll when cash flow is down
Running into payroll and cash flow issues are never pretty, and are always a stressful spot to be in as a small business owner. Regardless of why and how you came up against the challenge of getting enough money in the coffers to pay your employees, there are ways to get by. Best of all, some of these options can even set you up for steadier cash management in the future as well.
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Ready to learn more about managing payroll? Learn how payroll software can help finances teams stay on top of their invoicing needs.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small-business loans that matches business owners with the best funding providers for their business. Specializing in financial advice for small-business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness, and more.