Struggling to cover payroll: options for UK companies

When payroll is at risk, owners usually do three things: work out the exact shortfall, treat wages as the payment to protect, then decide between deferring other bills and a short-term facility, based on whether next month looks better. Missing payroll damages a business faster than almost any other missed payment, so it is the cash problem to settle first.

None of it needs panic borrowing. It does need moving quickly, and in the right order.

What should I do first if payroll is short this month?

First, quantify the gap precisely, wages due, the date, and every receipt expected before that date. Then rank what else can move: most suppliers will extend once if asked early, and rent is often negotiable for a single cycle. Wages come first because losing staff, or their trust, costs more than any late fee.

If a gap remains after moving what can move, this is where businesses look at short-term facilities. Each lender sets its own rules on what a facility may be used for, and a short-term facility is generally assessed on the trading behind it rather than on the fact the money is for payroll.

How does payroll funding work?

Payroll funding is not a distinct product; it is short-term working capital used for wages. For a limited company or LLP the usual routes are invoice finance where the gap is caused by unpaid invoices, or a short unsecured facility repaid over a few months. Both come from the lenders on our panel.

Timing matters with a payroll deadline. Each lender sets its own, so the practical question for any lender or broker is what can complete before the pay date, with time to spare.

What borrowing looks like at payroll-sized amounts

Most payroll gaps are small, and short unsecured products are built for small sums. Terms can be as short as a month and published rates vary widely between lenders, which is the reason a one-month facility for wages should be checked as a total cost in pounds rather than as a rate.

Where the shortfall is an invoice timing problem rather than a trading problem, the ledger route is a different product: invoice finance, which reads the customers who owe the money as well as the business, and some invoice lenders do not need a homeowning director. It generally takes longer to set up than a short-term loan.

On the unsecured side, each lender sets its own view of adverse credit; the age of the mark, whether it is satisfied and the explanation all matter. None of this is a promise that a lender will accept a given case.

When is borrowing for payroll the wrong answer?

Borrowing for payroll is wrong when this month is not an exception. If wages need funding two or three months running, the business has a cost or revenue problem that a facility only delays, and each round of borrowing makes the eventual fix harder. In that situation the conversation that actually helps is with an accountant about costs, pricing or headcount, not with a lender.

It is also wrong when the repayment would make next month’s payroll harder than this month’s. Any facility considered for wages should be tested against the following two months’ cash flow, not just against the immediate deadline.

Frequently asked questions

Related pages

• Cash flow problems: practical options
• Working capital finance
• Invoice finance