Can’t afford to pay staff wages? Advice for Directors in Scotland

Not being able to pay your employees’ wages is one of the most distressing situations a company director can face. Your staff depend on you, and the pressure of knowing you cannot meet payroll can feel overwhelming.

If this is where you find yourself, you are not alone, we speak to directors across Scotland in this exact position every day. While this is an incredibly difficult position to be in, there are options available to you.

If you are facing an immediate payroll crisis, here are the steps you should take:

1. Be honest with your employees

This is a difficult conversation, but your staff deserve to know what is happening. In our experience, most employees respond better to honesty than being kept in the dark. Give them as much notice as possible that there will be a delay in receiving their wages. Explain the situation clearly, tell them what you are doing to resolve it, and give them a realistic timeline for when you expect to be able to pay.

You are not required to share every detail of the company’s financial position, but being upfront about the delay and the reason for it will help maintain trust.

2. Explore short-term funding options

Depending on your circumstances, there may be ways to bridge the gap:

• Invoice finance – if you have outstanding invoices from customers, you may be able to release cash tied up in your debtor book through invoice factoring or discounting.
• Short-term borrowing – a business overdraft or short-term loan may provide enough breathing room to cover payroll while you address the underlying cash flow issues.
• Chase outstanding debts – if customers owe your business money, now is the time to chase payment aggressively. A polite but firm approach can often speed things up.

Be extremely cautious about taking out further borrowing if your company is already in a financial precarious position. While short-term funding options may be appropriate to bridge a temporary cash flow shortfall, adding more borrowing onto an already indebted company is not the right course of action. If you believe you company is insolvent, or may soon become insolvent, you should not take out additional borrowing.

3. Speak to an insolvency practitioner

Not being able to pay your staff their wages on time should be taken as a huge warning sign that all is not well with the company’s finances. Payroll is a fundamental cost of running a business, and if there is not enough cash flow to cover it, this is a strong indicator that the company may be insolvent. If you believe your company may be insolvent, you should make it a priority to speak to an insolvency practitioner as a matter of urgency.

This does not necessarily mean the business has to close. But it does mean you need to take professional advice urgently. The longer you wait, the fewer options you will have.

A licensed insolvency practitioner will be able to help you understand your options, as well as provide expert guidance on how you should approach the situation with your employees. If the decision is made to liquidate the company and redundancies have to occur, a licensed insolvency practitioner can explain the situation to your employees on your behalf.