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Not being able to pay your employees is often a business owner’s worst nightmare. The workforce depends on the business, just as the business depends on its employees to function. Failure to pay staff wages and salaries on time is generally a sign of cash flow problems.
Historically, you may have been handling your daily expenses and paying staff ‘just fine’ but are currently experiencing difficulty in this area. We can help guide you through the best options for your business when it comes to employee payroll.
Common reasons I can’t pay my workforce
Usually, a failure to pay wages is a result of cash flow shortage. This could be a short-term problem for the business, such as a seasonal downturn. However, if there are bigger underlying problems within the business, such as a general decline in sales following a bad debt, loss of a large contract or late-paying clients, it could be an issue with the business model and a long-term problem.
What options are available if I can’t pay staff?
When you, as a director, are placed in the difficult situation of not being able to pay your staff, you must consider if the business is in a short-term rut or if the problem is likely to have long term repercussions.
If you can’t pay staff, but you believe the business is genuinely viable and has a future, there are solutions available to help the business survive. However, if there are deeper problems within the business, it may be necessary to ‘shut up shop’ and wind down the business in an orderly manner. In that situation, there is some protection available to employees (see below).
Is it short term & temporary?
If the inability to pay staff is only a temporary problem, the business can try some of the different options available to get a cash injection.
Ask staff to wait
Although business owners might not like it, sometimes asking staff to wait for payment is all they can do. If you believe that eventually the business can pay its employees, be honest with staff and explain the situation, hopefully, they will respond positively and support the business.
While this can give the business more time, especially if you are awaiting unpaid invoices, the fundamental problem might remain. Will the same problem occur again?
If you believe that the company is simply in a tight spot, or has just begun to struggle slightly, you could seek out a loan, from a bank, possibly friends or family. This could be a short-term temporary solution to allow you to continue trading. However, if there are underlying problems which have not been addressed, borrowing more money to help an already ‘sinking ship’ is more likely to add on further debts and creditors to the company.
If a director knows that the company isn’t working and is insolvent, they could be held personally liable for any debts incurred if they allow the company to continue to trade whilst insolvent.
Is it long term?
If there is a bigger cash flow problem which is a long-term issue, the business model needs to be assessed so that the company can find the best solution moving forward.
Is the business model viable?
If the business model is solid and could make a profit without the debt, there are arrangements which allow a company to continue trading while paying its liabilities. Which procedure is best suited for the business will depend on its current state.
Invoice financing is an option only available to B2B businesses. It allows businesses to raise finance from a factoring company, based on the value of its invoices. If the business can work but is being put into difficulties with cash flow via late-paying clients, or perhaps is growing quicker than it can generate cash, it can be the perfect way to put funds into the business and pay staff. With our help, we can find you the best deal for your situation.
Company Voluntary Arrangement (CVA)
A CVA is a procedure that can help you get the company back on track, and importantly, be able to pay all your employees. It will allow the business to come to an arrangement with its unsecured creditors and reduce any debts owed on a pro-rata basis. It can give companies the chance to continue trading while repaying creditor debt. This could solve cash flow problems and enable a company to pay employees.
Administration is only a viable option if it achieves a statutory purpose, one of which is getting a better return for creditors. If the business has outstanding contracts which it can still fulfil, it could mean there is a bigger pot of money to pay back creditors once the work is complete. This includes any payments due to staff who had to be laid off because of the administration process.
The business is not viable in its current structure
Sometimes the business model might not be viable in the current market, or the company is suffering from such a large amount of debt that it’s not feasible to continue. You might be better off closing the company down in these circumstances.
If the business simply isn’t working, not being able to cover payroll might just be the tip of the iceberg. There could be much larger problems within the business, and a liquidation might be the best route moving forward. Once the liquidation process begins, the priority will be ensuring that creditors are paid back as much of their debt as possible.
Employees who are affected by a liquidation are legally able to claim holiday pay, redundancy pay, any unpaid wages and payment in lieu of notice period (limits apply) from the Government, and we will assist with this process.
If your business has a future, but you are unable to meet payroll when it falls due, there are solutions to be found to keep things going and pay staff. Alternatively, if a failure to pay employees is just the start of insolvency, it’s highly recommended to start looking into the most efficient way of closing the company down.
How we can help
We can help you navigate through the process of invoice financing if there is an option for keeping the business trading. Alternatively, there may be ways of rescuing or restructuring the business. If it is time for the company to come to an end, we can offer you support for closing the company down in the most efficient manner. Whatever the situation, the sooner you ask for help, the greater number of options are likely to be available.
Dealing with creditor pressure
One of the least pleasant aspects of suffering from business debt is dealing with creditor pressure. If confronted with a persistent creditor or debt collector, knowing how to deal with them can make your situation easier to manage. If you’re aware of what separates creditor harassment from reasonable action, it can help identify when creditors are being too forceful, and you may have grounds to make a complaint.