Can’t afford to pay my employees. What can I do?
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 cannot 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 cannot 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?
Loans
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.
More information about company recovery
Invoice financing
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.
More information on Company Voluntary Arrangements
Administration
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.
More information on company administration
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.
More information about company closure
Liquidation
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.
Read more about Creditors Voluntary Liquidation
In summary
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.
More on dealing with creditor pressure
Case Studies
ARB (Sound Vision Light Power) Limited
Kelly Burton • Leisure & Hospitality • Administration
Wilson Field has secured a new future for a Banbury headquartered events management company, which boasted clients including Crufts, Tour of Britain and Virgin London Marathon after it was bought out of administration.
ARB (Sound Vision Light Power) Limited was established in September 2014 and specialised in event hire including providing audio visual solutions equipment, hire and installation.
The company, which traded from Coton Cottage, Chacombe near Banbury, called in administrators from Sheffield-headquartered Wilson Field for formal insolvency advice.
The company, which has an impressive client list and relied solely on sub-contractors as and when needed, suffered VAT and HMRC issues as a result of a period of illness.
Kelly Burton and Lisa Hogg from Wilson Field were appointed as joint administrators on February 20 and concluded a pre-packaged sale of the business and assets for an undisclosed sum to ARB Motors Limited, lead by the same management team.
Kelly Burton, director and licensed insolvency practitioner at Wilson Field said:
Wilson Field was brought in to look at the situation of the business.
The focus on the company had diluted during a period of illness of one of the two directors. A debt was due to HMRC and a repayment proposal was rejected resulting in the need to protect the business and assets via a formal insolvency procedure.
The pre-packaged sale means the business, which was an established player in event management at large scale events, has a bright future moving forward.
The loss of a major employee’s input through illness can harm an organisation and it is important for businesses to seek help should this arise. Timing is essential to keep focus on the business.
ARB has combined experience of more than 100 years and provided hire equipment such as indoor and outdoor PA systems, single and double-decker commentary units, street sound vehicles, exhibition TVs, stage lighting and mobile power in both primary and secondary distribution.
Derwent Castings Limited
Kelly Burton • Metals • Creditors Voluntary Liquidation (CVL)
Unsecured creditors owed money by a Derbyshire manufacturing company which went into liquidation are to receive a higher than the expected dividend of 60p in the pound.
A total in excess of £128,000 is due to be distributed to unsecured creditors of Whatstandwell-based Derwent Castings Limited, whose claims totalled over £192,000.
The company, whose roots date back to the 1940s, had traded profitably for a number of years but in late 2013 / early 2014 saw the cancellation of its largest sales contract which represented 70 per cent of its turnover.
Bosses at the company, which employed 16 staff including three directors, struggled to attract replacement business and had to drop prices. Further business was lost as a result of foreign competition.
Sheffield’s insolvency specialist Wilson Field was called in as liquidator and worked with the creditors’ committee of Derwent Castings Limited to secure the positive dividend.
Andy Wood, associate director and insolvency practitioner at Wilson Field said:
“Dividends for insolvent companies are generally low, or nothing, for a variety of reasons – cost of staff redundancies, difficulty collecting outstanding invoices, selling assets in a forced sale situation, selling specialist assets which have limited appeal to purchasers, deteriorating or perishable assets, as well as other costs involved.
“However, thanks to a very positive relationship with the creditors committee, I am delighted to return a healthy dividend to the unsecured creditors in the region of 60p in the pound.
“The supply chain is often greatly affected by a liquidation and in this case we have been able to help creditors.”
Derwent Castings Limited was incorporated in August 2002 and specialised in iron casting from the five-acre Derwent Foundry site at Whatstandwell near Matlock.
However, the iron founding operation at Derwent Foundry was first introduced back in 1946 by Wragg & Hawksley which produced cast iron pipes for the water industry.
In 1950 the foundry was acquired by WH Davis & Sons Ltd to supply castings for their railway wagon building business. Following a management buy out in 1984, the company was renamed Derwent Foundry Ltd and following its closure in July 2002, was bought by its present owners and renamed Derwent Castings Ltd.
Amongst jobs carried out on site were moulding using loose pattern and modern air setting (boxless) sand systems; metals work using the latest in electric induction melting producing a wide range of grey, SG and alloy irons; an independent Namas approved test laboratory, finishing, pattern making and machining facilities.
Precision Engineering Business
Kelly Burton • Construction & Engineering • Administration
A bespoke precision engineering business, working predominantly in the automotive and aeronautical sectors, found itself experiencing cashflow difficulties caused by an increase in costs due to the uncertainties surrounding Brexit, and the loss of a key member of the sales team.
When the company’s largest customer reduced its spending by 50%, the director felt the business couldn’t continue and sought advice from the team at Wilson Field.
Wilson Field marketed the business and assets for sale, and a sale of the tangible assets was completed immediately following the administrators appointment, to an unconnected third party.
Kelly Burton, insolvency practitioner and director at Wilson Field, said:
“With so many complications surrounding Brexit, coupled with the loss of some key staff, the company experienced some cashflow difficulties it could not get out of.
There was a positive outcome in the end as some of the tangible assets within the company were sold, which meant a good return for creditors.”
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