What to Do If You Can’t Make Payroll
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4 Steps to Immediately Follow If You Can’t Make Payroll

Running a small business is difficult. That’s why only half of small businesses survive beyond their fifth anniversary. That’s scary.

Payroll is the biggest expense for many small business owners. But, you need employees to keep your business running. Experiencing a day where you can’t make payroll could easily turn into a nightmare.

There might be many reasons why you can’t pay your employees. Maybe the local economy is sinking. Maybe the big sale you were counting on fell through. Or, maybe your cash flow is simply jammed up.

No matter the cause, here are four steps you should follow if you can’t make payroll.

Step 1: Admit that you can’t make payroll

Odds are, there are signs in advance that you will come up short on payday. You can often see your business’s accounts draining to zero.

As an entrepreneur, it can be embarrassing to admit that your business isn’t the success that you envisioned it to be. You’re having a rough streak. But, you need to swallow your pride and tell your employees what is happening.

Some of your employees might live paycheck to paycheck. You need to talk to your employees as soon as possible to soften the impact. The news will still hurt, but the sooner you tell employees, the more time they will have to prepare.

Tell employees your plans. Let them know how you plan to pay them and what steps you are going to take to get the business back on track. If employees should begin looking for other work, you need to tell them this, too.

You do have something to your advantage that big businesses don’t have. Small businesses often feel like family. You and your employees might know each other well. This family environment could make employees more willing to stay by your side during this turbulent time.

Step 2: Find financing

Now that you’ve accepted that you can’t make payroll, you need to find financing as soon as possible. This is where you really step into payroll triage.

Before you start looking for financing, figure out how much money you need. This might help you determine how drastic your financing methods need to be. Remember, part of payroll is paying taxes, so you need money for that too.

Below are five resources that might help you make payroll.

Personal funds

Look at your personal savings. Can your family afford to invest some money to help you make payroll? You might also be able to use credit cards to make payroll.


Look at your accounts receivable. Do you have any customers that owe you money? Customers might be willing to make a payment sooner if you offer an incentive, like a percentage off their amount due. While this will cause you to lose money, it might help you to get paid faster. This is a trade-off that you might have to make if you can’t make payroll.

You can also do this with customers who are interested in your goods or services but have not committed to buying. Offering a discount might be what someone needs to go through with a purchase.


Talk to suppliers. They might be more understanding about missed payments than employees will be. Ask them if you can postpone a payment or work out a payment plan. Having extra time to pay suppliers could give you the money you need to pay employees.


You can try to get a traditional bank loan or an SBA loan. However, it can take a long time to be approved and have access to funds from a loan. Depending on when you realize you need help making payroll, a loan from a financial institution might not arrive on time.

You might also want to consider asking friends and family for financial help. Someone could be willing to loan you money with more generous terms than you can find from a traditional lender.

You do have another small business loan option: a hard money loan. You can receive funds in approximately 5 business days, which can help you in a tight payroll situation. Hard money loans often use real estate as collateral and have high-interest rates. Hard money loans are considered to be risky, so make sure you understand all of the loan terms. These short-term loans are often last resorts for small business owners.

Pay cuts

You might have to make pay cuts if you can’t make payroll. First, look at your own earnings. You can suspend your compensation until your business is back on its feet. This also shows your employees that they aren’t the only ones taking a financial hit.

You could reduce the hours employees work, which will reduce their earnings. You can do this by reducing everyone’s scheduled hours, or you can ask employees to volunteer to take time off instead.

You can reduce employee wages as long as employees are still paid at least minimum wage. If you have salaried employees, you can reduce their salaries. However, reducing employee salaries might change the exempt status of employees. If employees’ exempt statuses change, you must pay them minimum wage. Despite wage reductions, you must still pay overtime wages to all nonexempt employees who work overtime hours.

Step 3: Pay employees

You might have read this step’s heading and said, “But, I don’t have money to pay my employees.” Well, you still need to pay them.

Failing to pay employees on the regularly scheduled payday is a violation of the Fair Labor Standards Act (FLSA). When you violate the FLSA, you might have to pay back wages, back taxes, criminal penalties, damages, attorney’s fees, and court costs. You also face imprisonment. All of this will cost you much more than if you paid employees on time.

There is another reason to pay employees on schedule. Late paychecks could decrease employee effort and morale.

As mentioned in the pay cuts section of step two, you can reduce employee wages and hours. But, you must pay nonexempt employees at least minimum wage and overtime wages. Not doing so is also an FLSA violation.

Talk to your employees in advance if you need to reduce their hours and wages. Make sure there are no surprises on pay day. Let your employees know approximately how long their hours and wages will be reduced.

Step 4: Prepare for the future

You might have found a quick way to run payroll this time, but it is essentially a small patch on a damaged ship. You need to make lasting changes before you sink into business wreckage.

Take a thorough look at your business’s spending habits. Identify all your cash flow problems. You might need to restructure parts of your business.

Consider your overhead expenses. You might want to look at reducing the expenses that are not converted back into income. For example, payroll expenditures do not make you money. Payroll should be about 15-30% of your business’s gross revenue.

If you spend more on payroll, you should look for ways to reduce payroll and increase your revenue. Also, try an inexpensive, online payroll software. Using online software to run payroll is cheaper than other methods to run payroll.

If your business has an accounts receivable payment policy, you should look at it. If your policy is too lenient, you might not get receivables in a timely fashion. You will have cash flow problems when customers take a long time to pay you. And, cash flow problems mean you will have less money for payroll and bills.

If you aren’t making enough sales, you might want to do a market analysis. A market analysis can help you understand your customers, competitors, and industry. You can then adjust you goods or services to be more desirable.

For future financial emergencies, build up your business’s savings now. One way to do this is to commit to putting a certain percentage of your business’s income into a savings account.

While you are preparing for your business’s future, continue to be open with your employees. Telling employees that you can’t make payroll may cause them to second guess their job security, so let them know how you plan to get your business back on track. Tell them how your plans might impact them.

You might want to consider ways to boost employee morale—inexpensive ways, obviously. You want to keep your employees satisfied, even during your business’s difficult times. After all, employees help keep your business running.

As you prepare your business for the future, you might want to consult an accountant. An accountant can help you understand where your money is going so you can make informed business decisions.

Do you need an inexpensive way to run payroll? Patriot’s online basic payroll will save you both time and money. Try it for free!

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