When does it make sense to borrow money to cover payroll?

2 MIN. READ

Ideally, payroll should represent between 20-30 percent of your business’ expenses. Balancing your expenses and cash flow requires a lot of careful planning, but there are situations where planning won’t be sufficient.

Covering payroll, payroll taxes and benefits paid to employees can become a challenge if you run into cash flow disruptions or delays. Under the Fair Labor Standards Act, you are obligated to compensate employees promptly. Pushing back payday can have disastrous consequences on a business, including crushing morale. Employees will start seeking other opportunities if you are unable to compensate them.

You can maintain confidence in your business’ leadership and morale by borrowing money to cover payroll. There are different options to consider, including using a credit line, borrowing against future sales and borrowing against accounts receivable.

Here are a few examples of situations where you should consider borrowing to cover payroll expenses.

Disaster scenarios

A new recession or economic crisis can cause your sales and revenues to come to a standstill. A news story or new policy that impacts your industry can have severe consequences on your revenues as well.

Likewise, a natural disaster can completely disrupt your business. Your client base might not be in a position to make purchases or the aftermath of the disaster might prevent your business from operating as usual.

Those are scenarios where financing payroll by borrowing means that employees will stick around and can still support their families while you focus on creating a plan to get back on your feet.

Planned and unplanned expenses

Businesses sometimes incur major expenses that weren’t planned. Here are a few examples:

  • A major piece of equipment breaks and needs to be replaced or repaired
  • There is an urgent need to upgrade equipment for safety reasons
  • You need to purchase a software upgrade to meet new compliance requirements
  • You receive a large order or see a sudden surge in sales and need to spend more on inventory
  • You need to cover costs associated with hiring specialized talent or with hiring several seasonal employees

In those scenarios, an immediate expense reduces your cash flow but results in growth. Borrowing to cover payroll helps balance your finances and frees up cash for necessary expenses.

Cash flow delays and disruptions

Losing a major client or having a client cancel a large order is going to impact your revenues. You might also encounter difficulties with collecting some accounts, whether you deal with delays or failure to collect.

Issues with accounts receivable or clients can temporarily freeze your cash flow. Borrowing will help you cover immediate expenses like payroll and give you time to bounce back and find new clients.

Covering payroll should be a priority, but there are different unexpected situations that can reduce your cash flow. If you find yourself unable to cover payroll, assess your situation and compare financing options to find one that makes sense for you.

 

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Tips of choosing the right payroll company

Payrolls are important; it’s essentially what makes your employees the happiest.  Choosing the right payroll company can help lessen stress and make the process run smoothly. Here are top five tips in choosing the right payroll company for you!

1) Look for a top-notch customer service

Picture this-  it’s the first Friday of the month and your employees have to get paid, but for some reason the payroll system isn’t working…you are in panic. Angry employees are no fun.  You only notice this half an hour before the payroll report is due. You call up your payroll company and put on hold for around 40 minutes…panic turns into more panic. There is no better feeling than being able to reach someone on the phone when you have a question, no matter the time of day.  When finding the right payroll company for you, make sure they have a great customer service team who is always available when you need them!

2) Data security as strong as the secret service

Security is one of the most important aspects of choosing the right payroll system for your company. Considering all of the sensitive information that payrolls have, if someone who is not authorized gains access to it, it can be a nightmare for both the employers and employees. Make sure you choose a payroll system that is insurance and have a high-security encryption.

3) Clear pricing and no unwanted surprises

“Get monthly payroll for little as $13.99 when you sign up today!”- sounds pretty enticing doesn’t it? However, it’s important to always look closely at the fine print of the advertisement.  Furthermore, make sure you look at what are the additional features you may need and if they will cost you. For an example, some payroll companies charge additional fees for automatic check signatures or printing and check delivery.  Before choosing the right company for you, make sure you outline exactly what you need and get an estimate on the total cost.

4) Take consideration of your company’s employee count growth

Look for a payroll company that grows with your employee growth. It should be easy to start off with and to add on new employees as needed. Consider evaluating the set-up time that it takes for you to set-up an employee. Time is of the essence!

5) Look for top notch IT solutions

It’s 2018, your payroll system should not look like dinosaurs have used it. Look for a payroll company that has a great IT infrastructure!

 

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