Ideas for Paying Employees When Finances are Tight

The coronavirus has rattled the world, and while the health consequences are dire, the economic fallout could be worse.

In just one week, from March 7 to March 14, initial unemployment claims jumped by a third, rising from 211,000 to 281,000. And while we don’t know whether workers have been laid off or furloughed, we do know that lost jobs are bad for families, employers, and the nation.

Job losses translate into increased federal spending and a slower response to unemployment claims, and those businesses that have to hire or train new employees down the road will undoubtedly take a financial hit later. Even if it’s difficult, your business can benefit by keeping employees on payroll and by modifying your business plan.

What might this look like? Here are some options to consider:

Lower Overhead Expenses

The most effective response to financial pain is to freeze spending wherever possible.

This may mean holding off on new investments, eliminating projects where costs exceed value, or re-proposing previously rejected cost-savings ideas. Want a more comprehensive guide to cutting costs? Check out this article from the Harvard Business Review.

Consider Alternative Financing

While borrowing may not have previously been in your plans, the Small Business Association is working directly with state governors to provide targeted, low-interest loans to companies that have been severely impacted by COVID-19.

The SBA’s Economic Injury Disaster Loan program may provide the vital support you need during this temporary loss of revenue. Other options to consider are family borrowing, hard money loans, or seeking a float loan from a customer or an external “angel investor.”

Liquify Assets or Discount Existing Receivables

How can you attain missing funds to pay employees in a crunch?

“Beg, borrow, or sell whatever you need in order to come up with the funds,” says Rod Jorgensen, the director of counseling at the Nevada Small Business Development Center. Whether you sell vehicles, buildings, or equipment, put every option on the table for consideration.

Donald Todrin, founder of the Northhampton, MA-based Second Wind Consultants, says taking as much as a 50 percent hit on your outstanding receivables may also be a wise strategy:

“If I’ve got $25,000 out on the street that I’m owed, I’d slash it down to $10,000 on a promise [that vendors] wire me the money today,” Todrin said. “Pay me half [of what you owe me] and I’ll wipe [the debt] out. And you raise cash instantly and overnight. Now you pay a price for that because that’s your overhead money, but you cover your payroll. You got to play for another day.”

Be Resourceful and Keep Employees in the Loop

If you know you are unlikely to make payroll, it’s essential to be honest upfront.

Proactive communication is crucial during a crisis. If finances are tight, tell people up front, starting with the natural hierarchy of company leaders and involving them in the process. Allowing leaders to inform their teams can soften the blow and make it easier to gather feedback.

And be creative. Teams that want to retain employees in extremely tight situations may consider shrinking paychecks across the board or ask the highest paid, top-level staff members to (electively) forgo paychecks for a short time so lower-level employees can still be paid. This spreads out income and grows confidence and unity in your staff.

People First

Though you may not be closing shop, many businesses will experience shortfalls in this season. Creative, sacrificial entrepreneurs will work hard to protect their most valuable asset: people.