The Situation

I have a friend who owns a company that makes plastic cups sold all over the country. He recently landed a big order and had to make a large cash deposit with his cup manufacturer in China in order to begin the cup manufacturing process. While he is expecting a large payment from another of his customers late next week, he was expressing his nervousness to me on the phone today because that customer has occasionally been late on payments. They always pay, but sometimes, it’s just late. His biggest concern is that he has a payroll at the end of the month that he cannot miss. So, what was my advice on how to make payroll? I did what most folks do these days: I looked up to the heavens, outstretched my arms and asked … well, not exactly. I just pulled up Google on my computer and made an inquiry.

Google Search Results for “Problems Making Payroll”

What I found surprised me. There were not all that many solution-oriented choices to view. The top choices were stories about municipalities getting into trouble and not paying workers, articles referencing legal problems that arise from missing payroll, and of course in the page one search results I saw the Electronic Federal Tax Payment System link … the IRS wants to make sure THEY get their money!

I did find one decent article that touched on different critical issues a business should consider in advance of missing payroll including:

• Advice regarding notifying employees in advance – the bottom line is to get over your ego or embarrassment and tell the employees ASAP, directly from top management. Don’t wait, only to surprise them and let the rumors get out of control. Some may even be willing to take temporary reductions in pay based on the honesty you exhibit, which may help the situation.

• If you are going to miss a payroll, you’re likely also missing the payroll tax payments. If your company has a board of directors, personal liability may be involved for those directors and that is a very bad situation.

So, back to the main point of this topic, how can you get creative when you’re worried about how to make payroll?

• Get a loan from a friend or family member – this is usually done quickly and if you are fairly certain you will have money available to pay back this loan, it could be a great option. You should expect to pay some interest (there is actually a minimum interest rate defined by the IRS, so check with a tax advisor) and try to pay the loan back as quickly as possible.

• Get a merchant cash advance - If you own a company that sells to the general public retail consumer, check out if a merchant cash advance loan is a possibility. This kind of loan provides you an advance of cash that is paid back through future collections made on credit card purchases by your customers.

• Tap out your personal credit cards – No explanation necessary on this one, just be aware of the fees charged for cash advances versus regular charges for retail goods/services.

• Research a factoring company - If you sell to or service commercial businesses, you’re able to utilize your existing accounts receivable (which is money you should ultimately collect from your customers) to get an advance of cash in the near term.

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Download our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.