8 solutions if you can’t meet payroll
Here's what you need to know:
Editor’s note: This article was updated March 31, 2020, to include information about the Paycheck Protection Program.
As a small employer, you’re likely running on limited resources, and payroll is probably your biggest operating expense. It’s also a pretty inflexible expense, as the law requires you to pay your employees on time.
But what should you do if, because of the novel coronavirus, you can’t pay your employees by their next payday? Here are 8 solutions to guide you through this trying time.
1. Apply for the SBA’s Paycheck Protection Program
The program is intended to incentivize small businesses to keep workers on payroll through the coronavirus pandemic by offering low-interest loans, which can be forgiven if the borrower keeps workers employed. The loan program was part of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act.
Loans can be up to 2.5x the borrower’s average monthly payroll costs incurred during the year prior to the loan origination date. The maximum loan amount is $10 million. Interest rates will be capped at 4%.
The SBA has provided a downloadable sample application form here, and will begin administering loans on April 3, 2020.
You are eligible for a Paycheck Protection Loan if you meet one of the following requirements:
- A small business with fewer than 500 employees
- A small business that otherwise meets the SBA’s size standard
- A 501(c)(3) with fewer than 500 employees
- An individual who operates as a sole proprietor
- An individual who operates as an independent contractor
- An individual who is self-employed who regularly carries on any trade or business
> Read more about the Paycheck Protection Loan program in this article
2. Apply for the SBA’s COVID-19 disaster loan
On March 12, 2020, the SBA announced that it’s offering up to $2 million to each small business impacted by the novel coronavirus, or COVID-19. This offer is part of the Coronavirus Preparedness and Response Supplemental Appropriations Act, recently signed by President Donald Trump.
Per the SBA, the loan is designed to cover “fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.”
The interest rate is 3.75% if you’re unable to secure credit elsewhere.
Note: You’re not eligible for the loan if you can get credit elsewhere.
For nonprofits, the interest rate is 2.75%. The SBA is offering repayment plans of up to 30 years.
You can apply for the loan only if an Economic Injury Disaster Loan (EIDL) declaration has been made for your area. Note that it could take 2 to 3 weeks to receive a decision on your loan application.
3. Explore state and local resources
Some states and localities are providing financial relief to small businesses that have lost revenue because of COVID-19.
For instance, on March 8, 2020, New York City mayor Bill de Blasio announced that New York City businesses with less than 100 employees and at least a 25% drop in sales (caused by COVID-19) will qualify for loans of up to $75,000, with no interest. Further, small businesses with fewer than 5 employees can apply for a grant to cover 40% of their payroll expenses for 2 months.
4. Look into other business loan options
Maybe you can’t afford to wait weeks for an answer on your government loan application. Maybe you don’t qualify for any government loans. Either way, alternatives are available.
The SBA’s Lender Match program is a great online resource that puts small businesses in touch with SBA-approved lenders. The program offers many types of loans, but eligibility, credit decisions, and turnaround times vary by lender.
With the Export Express loan, you’ll have a decision on your application within 24 hours. There’s also the SBA Express loan, which delivers a response to your application within 36 hours. Note that if your application is approved it will take some time for you to actually receive the funds.
You could apply for a business line of credit through your bank, but the process is typically extensive. Also, be prepared for stringent qualification rules, as banks usually examine the financial stability of the business, among other things.
5. Get personal
If you have a credit card or enough personal funds to cover your payroll, this is likely the quickest way to make payroll happen. Although using your personal assets for business expenses is generally not advised, it may be worth the risk if you’re confident your business will rebound.
Asking your family or friends for a loan can be tricky. Assuming they have the money, they’ll probably assist if:
- Your relationship with them is in good standing
- They believe you will repay them
Depending on the situation, you could offer to repay them with interest, or instead of requesting a loan ask them to invest in your business.
Also, examine your own compensation and see if there’s room to cut back. You can always increase your earnings once business turns around.
6. Accelerate your accounts receivable
Now is the time to collect past-due balances. Of course, you can’t force delinquent customers to pay you right now. Plus, they, too, are probably undergoing their own financial stresses brought on by COVID-19.
Still, reach out to them and remind them of their outstanding balance. You can also give incentives for fast payment, such as reducing the amount owed or discounting future sales. Before you offer incentives, make sure you can withstand the loss.
Another alternative is invoice factoring, which allows you to use unpaid invoices as collateral for cash. Invoice factoring provides quick access to cash, sometimes within 24 hours. But make sure you consider the downsides, such as high interest rate, before going this route.
7. Seek payment extensions from your suppliers
Often, suppliers will oblige, provided you aren’t too far behind on your payments. Plus, with COVID-19 at large, suppliers are likely to be more understanding now. Many are actively working with their customers to develop payment plans and other repayment methods.
Delaying accounts payable may help you make payroll, but remember, those postponed invoices have to be paid at some point. Also, the amount probably won’t be enough to cover your payroll expenses. For these reasons, this tactic is best reserved for helping to fill the payroll gap while you’re waiting on a more long-term solution to come through.
8. Communicate with your employees if payroll will be late
While employees may initially be upset by the late-payment news, it’s better to give them a heads-up rather than surprising them with no notice and no paycheck on payday. Explain when they will be getting paid, thank them for their patience, and assure them you’re working on corrective measures for the future. Once you’re back on your feet, consider offering bonuses or pay raises to show your appreciation.
If you’re planning to keep your employees, you should have a strategy for paying them on time going forward, after making the late payment. If you have no idea how you’re going to pay them next time around, then you’re just winging it — which is a big payroll no-no.
9. Reduce work hours, cut staff, or close shop
This is difficult to swallow. But if COVID-19 continues to hobble your finances, then you may have to reduce employees’ work hours or let some people go — just to stay afloat.
If you have no choice but to close shop or declare bankruptcy, consult with an attorney to determine the best course forward. Whatever you do, try to give your employees their final paychecks to avoid legal issues.
Under U.S. bankruptcy laws, if a company files for bankruptcy and owes wages, the unpaid employees are regarded as creditors of the bankrupt company. Further, creditors who are owed wages, salaries or commissions receive high priority for repayment.