Starting a small business is exciting and challenging at the same time. For many newly opened businesses in the U.S., the first one or two years will be filled with obstacles, but most will overcome them.
However, many small businesses struggle to find continued success past their fifth anniversary. About half will close within five years, according to the Small Business Administration Office of Advocacy.
Slow finances cause undue stress
Financial challenges are common in new businesses. An inability to keep up with debts - whether in the form of loans, money owed to suppliers or payroll costs - is often the final nail in the coffin. In 2016, 37,918 businesses filed for bankruptcy, according to the American Bankruptcy Institute. More than 9,000 followed suit in the first quarter of 2017 alone.
Lack of funds is a tricky problem for entrepreneurs. If they have a sound business model, they know the money will come in - eventually. But many times, immediate cash is what they need to survive.
After paying bills and debts, a shortage of funds may fall on the shoulders of employees - which, in turn, results in a sour company culture or even a loss of workers.
Many companies survive these unpleasant circumstances. It's all about how you choose to navigate the situation.
Here's what you can do when you're lacking the funds to pay your employees:
Be open and honest - no matter what
As a business owner, if you're carefully and responsibly watching your books, you know when you will or won't be able to make payroll. And, you usually know well in advance, Inc pointed out.
Don't lie to yourself or your employees when this happens. Come to terms with the situation quickly, and pass the information along to your employees.
"What I have found in my consulting business is that, more often than not, small business owners are embarrassed and worried about results, so they typically handle [the situation] emotionally," Donald Todrin, founder of Second Wind Consultants in Massachusetts, told Inc. "This usually means that they don't tell anybody until 10 minutes before they're supposed to get their checks."
By keeping employees in the dark, you're taking away their ability to plan for the gap in payment. Coming clean sooner rather than later is the best thing to do.
Consider a payroll loan
For some business owners, missing payroll is not an option. If it's happened before, or if you can't afford to disappoint employees, it's imperative that you find the funds to issue paychecks.
An alternative lending solution may be the way to go. Alternative lenders can offer quick cash so you can make ends meet. Then, the short-term loan will be paid off incrementally.
Other options might include staggering pay or requesting that employees not cash checks right away. Both of these are generally unadvisable, and Inc pointed out that the former is illegal in some states. But beyond that, these practices aren't a good foundation for a dedicated employee base.
"Once you start owning your employee's payroll, the employee is unsatisfied, will not put in his whole effort typically, and you're sowing the seeds for further erosion," Todrin pointed out.
The payroll loan allows for all paychecks to be paid in full, on time. And that, for many employees, is enough to keep their enthusiasm up during a rough patch for your business.