How to Fund Smooth Payroll Processing When Your Business Faces Cash Flow Gaps

Why Timely Payroll Processing Matters for Small Businesses

Having employees on payroll is a whole different ballgame than being a solo founder.  While you might be able to bootstrap things and stay lean, when you have employees, you have obligations to other people.

A major part of that is paying them on time. Timely payroll processing matters for small businesses because of:

• Trust: Employees show up to work and trust you will pay them on time for their labor and effort. Not paying on time effectively breaks that trust and takes time to repair.

• Morale: A team with good morale is a productive team that can help your business perform operations smoothly. Any delays in payment can lead to a significant drop in morale, and in turn, productivity.

• Retention: Keeping your best employees is key. Payroll issues can hurt employee retention and lead to costly turnover.

• Operations: It's essential to have business operations run and continue as normal. Any payment delays could put that at risk, as employees may lose focus or redirect their efforts elsewhere. For example, when the federal government shut down and workers didn't receive pay, some took time off to do Uber or delivery gig work.

• Compliance: The state and federal governments, along with the Department of Labor, have specific regulations in place regarding employee pay, including requirements under the Fair Labor Standards Act (FLSA).

• Credibility: It takes time to build relationships with employees. It can take a single incident to erase any goodwill. Payroll processing issues or any delays could reduce credibility in your company. The lack of credibility can impact employees now and the ability to recruit in the future.

How Cash Flow Problems Disrupt Regular Payroll Processing

Cash flow gaps can cause disruptions in payroll processing. Even if your company is profitable on paper, there can be timing issues that affect how much available cash you have on hand.

Some major culprits are:

• Delayed payments: If your clients or customers don't pay you on time, it can be tough to pay your employees on time.

• Seasonal slowdowns: If your industry is prone to seasonal slowdowns, making payroll can be a challenge. Revenue may be unstable, while payroll is a fixed expense.

• Unexpected costs: If you have insufficient cash reserves, any emergency repair or unexpected cost can eat into funds that may have been allocated for employee wages.

• Growth spurts: Your company may be growing fast, and onboarding employees to keep up. That means more payroll costs, which may need to be paid before revenue from sales comes in.

• Cash flow forecasting: Profitability is important but so is cash flow. If your business doesn't do cash flow forecasting, it can be difficult to understand where your cash position might be in the future. That can lead to cash flow gaps that can put undue strain on your company.

All of these situations are common and can affect your payroll processing. For example, a business owner might have six figures of revenue coming in for a project with net 30 payment terms. But employees get paid biweekly. If there isn't a cushion to fill the cash flow gap, it may affect payroll processing.

How to Avoid Employee Payroll Processing Delays

To avoid payroll processing delays, business owners can:

• Boost accounts receivable collection: Make sure to track invoices and outstanding payments. Invoice shortly after project completion and provide clear and transparent payment terms. You can even consider offering a discount if clients or customers pay faster.

• Forecast payroll costs: Review your payroll costs, deadlines, and taxes. Forecast these payroll costs against potential cash inflows.

• Create a payroll reserve: If possible, set aside funds to cover future payroll if there are cash flow gaps. Think of it as your business emergency fund.

• Review expense timing: If you have major purchases coming up or other expenses that might not be urgent, consider the timing. Ideally, you can make these purchases around payroll deadlines and not near them.

• Have a system: If you’ve been doing manual payroll processing, consider upgrading your system. You can utilize payroll software to help you with deductions (such as retirement contributions or wage garnishments), payroll taxes, and direct deposit.

• Create a contingency plan: Ideally, you create a contingency plan before you need one. If there are cash flow gaps, understand what financing options are available in advance.

Taking these steps may help you avoid payroll processing delays. But even if you have a payroll service to help you with time tracking, tax withholdings, and paychecks, that doesn’t necessarily solve a cash flow gap.

Types of Financing to Help Cash Flow Gaps

If you don’t have sufficient cash reserves to make payroll for the upcoming pay period, it can be incredibly stressful. You have employees relying on you and must meet federal and state labor laws.

After exhausting all other options, you can look into short-term business financing options to cover cash flow gaps. You might be waiting for customer payments or a major client to pay an invoice. But running payroll is still a necessity. Below, we cover different types of financing that can bridge potential gaps.

1. Short-Term Working Capital Loans

Working capital loans can be a good option if you need help covering operating expenses such as payroll.

As a financing option, it provides borrowers with a lump sum of capital. These funds can go toward payroll and other operating expenses. Typically, repayment terms are relatively short.

If you're facing a cash flow gap because of late client payments, working capital loans can help. Ideally, these loans are used to cover costs when you're in a bind. But if you consistently have trouble making payroll, additional loans won't necessarily help you in the long term.

If working capital loans make sense, check out the repayment term so you understand how long you have to repay the loan. Review future cash inflows against prospective monthly payments to help you avoid further cash flow problems.

When comparing lenders, review eligibility requirements, interest rates, and loan terms as they can vary widely. Another important factor to help avoid payroll processing delays is funding speed.

While you can get working capital loans from a bank or credit union, online and alternative lenders generally have faster timelines.

2. Business Lines of Credit

A business line of credit doesn't provide a one-time lump sum like a working capital loan. Instead, borrowers get approved for a credit line that is revolving.

In that way, it acts similarly to a credit card. The credit limit is available to use, and you can borrow what you need and only pay interest on that specific amount—not the overall limit.

Repaying the line of credit pays down what you owe, and the credit limit resets and is available to use again.

Business lines of credit can help avoid payroll delays and provide ongoing access to capital. If you know that you'll have a tough few months ahead while waiting for customer payments, this option can be beneficial.

Evaluate the interest rates and potential fees and make sure to understand the draw schedule versus the repayment schedule.

3. Which Option Should You Choose for Payroll Funding?

A working capital loan and a business line of credit can be a means to an end and avoid any payroll trouble. To decide which option is better for your needs, consider the following:

• Eligibility requirements
• Minimum loan amounts
• Maximum loan amounts
• Repayment structure
• Loan structure (lump sum vs. revolving)
• Interest rates
• Fees
• Repayment terms
• Funding speed

Financing can be a much-needed solution in this case. But for long-term viability, it needs to work with your cash flow. You can apply for working capital loans or business lines of credit at banks, credit unions, and online lenders.

Each option will have different requirements for borrowers. Typically, lenders evaluate:

• Time in business
• Annual revenue
• Credit history
• Cash flow

As a result, lenders may ask for business bank statements, financial statements, and tax returns. Getting your documents in order before applying can avoid further delays so you can get the capital you need to make payroll.

Final Thoughts

Payroll processing is a key part of running a business. It might not be the most glamorous or fun part, but it’s essential for operations and business longevity. If you’re facing cash flow gaps, work to improve your accounts receivable collections. To help in the meantime, you can look at business financing options from lenders that can provide capital to keep everything running smoothly.