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Should I use a business card’s cash advance to pay my company’s payroll?

Cash advances are expensive and may cause you to rack up card debt fast; consider other options instead

Summary

If your company has cash flow issues that keep you from making payroll, a credit card cash advance is not a wise solution. Consider applying for a credit line with your bank or borrow from future invoices instead.

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Dear Your Business Credit,

I run a three-employee, professional services business. When clients pay me late, I sometimes get into a cash crunch to the point I can’t make payroll using the funds in my business bank account.

I’ve been lending my personal money to the business but am wondering if I should be using my business credit card to take cash advances instead? – Debbie

Dear Debbie,

You’re not alone in having trouble making payroll sometimes. QuickBooks found in a 2019 study that 61 percent of small businesses struggle with cash flow and 32 percent have been unable to pay loans or to pay themselves or employees due to cash flow issues.

You never want to miss payroll, because you have a statutory obligation to pay your employees but raiding your own personal funds is not always the best solution. For one thing, it can make it hard to pay your personal bills. It’s also not a good permanent solution.

Check out all the answers from our credit card experts.

Ask Elaine a question.

See related: How business charge cards’ flexible payment options help manage cash flow

How to find a solution to payroll issues

I’d recommend you do a financial analysis of your business to determine if you really can afford to keep three employees on payroll.

If you are consistently in danger of missing payroll, it could be that your overhead is too high for the cash flow you have in the business.

Even if you earn a considerable amount over the course of a year, if the cash is not available to you when you need it, you will need to scale back your spending to a level you can sustain even if clients do pay you late.

If you don’t want to cut back anyone’s hours or cut an employee from payroll, consider lowering your salary below what it is now and taking more of your compensation as a distribution, so you have a little more wiggle room as to when to pay yourself. (Ask your accountant about the tax implications first).

Late-paying clients are a reality for many businesses, so it’s important to consider that reality in your planning – rather than looking at it as an unexpected event. Otherwise, you’ll face the same situation every month.

Tight on payroll? Consider applying for credit

If you have very good credit, you might consider applying for a line of credit with the bank where you have your business bank account to tide you over during cash crunches.

Generally, the interest rates you will get at a bank are going to be better than if you take a cash advance on a credit card. I would not recommend using cash advances on your credit card to make payroll. It can lead to building up debt you can’t pay.

Another option? Borrow against invoices

If you invoice your clients through software such as QuickBooks or FreshBooks, you might also consider borrowing against your receivables when you are in a short-term cash crunch. Both of them have partnerships with Fundbox, which allows you to borrow against specific invoices in these accounting systems.

You can pay back the amounts over either 12 or 24 weeks, as the invoices get paid. That money is automatically deducted from your bank account. The pricing is higher than you would get at a bank, so keep that in mind.

The calculator available on Fundox’s website will tell you the cost. For business owners who don’t want to max out their credit cards, this approach to borrowing is sometimes attractive, as it doesn’t add to your credit utilization.

Of course, a solution like this will not be very helpful to you if the value of your receivables is not enough to cover your payroll. It’s also important not to borrow so much money that you do not have enough to cover your expenses beyond payroll, like utility bills.

Managing cash flow is a big challenge for many business owners. Sometimes, it’s hard to handle it all alone. When you’ve got some extra money in your bank account, I’d suggest meeting with your accountant to see if there are any ways you can improve cash flow. Making payroll will be a lot easier once you learn to stay on top of this.

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