When payroll is due and the cash is not there

Payroll is the one bill a business cannot be late on. Your people are counting on it, and in Canada the deductions you withhold from it belong to the government the moment you pay. If payday is coming and the account will not cover it, here is how to think it through.

First: never use source deductions as a loan

The income tax, CPP and EI you withhold from employees' pay is held in trust for the Canada Revenue Agency. Using it to cover a cash gap — paying staff their net pay and remitting late — is the most expensive short-term borrowing there is:

• The CRA's late remittance penalty starts at 3% for one to three days late and rises to 10% after seven days — and to 20% for repeated or deliberate failures in the same year.
• Interest is charged on top, compounded daily.
• Directors can be held personally liable for source deductions the company did not remit.

For most small employers, remittances are due by the 15th of the month after payday. Whatever else happens, plan for that date.

If payday is this week

Look at what is owed to you. Call the customers with overdue invoices today. A polite, specific request — "we need this by Thursday" — works more often than people expect.

Draw on a line of credit. If you have a line of credit, this is exactly what it is for.

Talk to suppliers, not staff. Most suppliers will take a payment plan for a week or two if you ask before the bill is due. Your staff should be the last people to wait.

Put money in yourself, properly recorded. An owner's loan to the company is common in a pinch. Have your bookkeeper record it as a shareholder loan so it can be paid back cleanly.

Talk to your team honestly if it truly cannot be met. Provincial employment standards set when wages must be paid; a late payroll is a legal matter as well as a human one. It is a last resort for a reason.

Financing that fits a payroll gap

A line of credit is the right tool when payroll lands before receivables do and the gap comes and goes. You draw what you need and pay it down when the money arrives.

Receivables financing fits when you have good invoices that pay slowly — invoice factoring or asset-based lending turn them into cash now.

A short-term loan can bridge a one-off gap — a delayed contract payment, a large order you are staffing up for — but check the weekly payment against your slowest month before you take it. See short-term business loans.

What to avoid: taking an expensive advance every few weeks to make payroll. If the gap is every pay period, the problem is not timing, and borrowing will make it bigger.

Stopping it happening again

• Map the month. Write down when money arrives and when payroll, rent and remittances leave. Most payroll crunches are visible weeks ahead on a calendar.
• Invoice faster, chase sooner. The gap between doing the work and being paid is usually where payroll money is hiding.
• Keep a payroll buffer. One pay period in a separate account, not touched for anything else.
• Arrange a line of credit before you need it. It is far easier to get approved when the account looks healthy than the week payroll is short.

For how cash gets tied up in the first place, see what working capital is.