From Mark Mandula, Chief Marketing Officer
As was widely reported online and in most business-related publications, the abrupt closing of the payroll giant processor, MyPayrollHR has left small businesses and their employees scrambling in a state of financial panic. And with good reason.
MyPayrollHR and its parent company, Value Wise Corporation closed last Thursday (September 5, 2019) without any warning. It shut down its website and stopped returning phone calls. The company stated that it had over “5,000 companies as clients” as of this past summer. To say this has caused trouble for their former clients would be an understatement. Here’s a snippet from WKRC Local 12 in Cincinnati, Ohio.
FOREST PARK, Ohio (WKRC) – Robert Nichols and his wife noticed something wrong with their bank account Thursday. “We saw that there had been a deduction from our bank account that was exactly the amount of the previous paycheck,” Nichols said. They knew it was wrong and called the company. The couple was told it was a mistake and the paycheck would be put back in their account. “We didn’t think much more of it, thinking the money would be deposited today, and, much to our surprise today, we found that another [paycheck] had been withdrawn,” Nichols said. It didn’t stop there, a third check was now pending, waiting to disappear.
“We started frantically calling because there was another [third] paycheck amount pending withdrawal. So, basically, three paychecks were in arrears at this point because [the company] had withdrawn two and one hadn’t come through yet,” Nichols said.
They reached out to their bank to try and freeze the account so no more paychecks could be withdrawn, but they were told no. “We couldn’t mark the withdrawals as fraudulent because it came from the original payer. So, the deposits came from this particular account and that was the same number that was pulling it back out. So, [the bank] said they couldn’t stop it from happening,” Nichols said. The problem wasn’t with the employer. It was a payroll company in New York. MyPayrollHR shut its doors and closed without warning. The company is reportedly under investigation and its assets have been frozen. It also is withdrawing recent paychecks it processed for businesses across the country. It sent an email to businesses saying they needed to find a new payroll company. That’s left thousands, maybe tens of thousands, in the same boat as the Nichols.
“We for many years lived paycheck to paycheck, and something like this would have devastated us, but fortunately we’ve been lucky enough to put away a few bucks and it took us within a few dollars of going into the negatives,” Nichols said. Luckily for the Forest Park couple, the employer dropped off a paper check to cover the first missed one and says it will cover the other two as well.
“I can’t imagine what we would be going through right now if they hadn’t been able to do that because I was unemployed for almost five months and just recently started a new position and our savings is what we lived off of, so there wasn’t much left,” Nichols said. There’s a growing Facebook group for victims. It already has more than 900 members as of this writing. Click here to read the original story.
So now what?
Businesses in this situation are in a tough spot. More importantly, what options does a business have to get back on their financial feet?
There are many options for the business owner to help them get over a cash crisis like this unfortunate closing of MyPayrollHR. I have outlined several below. Unfortunately, most simply cannot happen overnight. The overnight solutions are incredibly expensive and may put the business in a financial hole it simply can’t dig out of.
The list below presents some options that a business could consider when a financial emergency occurs like the closing of MyPayrollHR. There are probably others [like borrowing from suppliers, accessing personal credit cards, and HELOC] that might also be options assuming that the business owner(s) have these tools already in place.
1. A traditional bank loan
While this seems to be the best option for a business, the days of just walking into your neighborhood bank, shaking someone’s hand and walking out with cash are simply over.
For obvious reasons, time is the most important factor driving the need to solve the short-term cash flow crisis like ones caused with the closing of MyPayrollHR. Aside from the business owner having a line of credit or a credit card advance feature, it is highly unlikely that the bank can move fast enough to meet the time crunch of the business. Federal Reserve data has documented that financial institutions are approving fewer small business loan applications, and this is a trend unlikely to change. When the business gains approval, they will get the most value-added and low-cost rate of interest when compared to other alternatives.
However, the traditional loan process is complex, time consuming and often requires the business to pay up front application fees, closing fees, legal fees and the like. The loan would also require a personal guarantee, good FICO scores for the owners, and collateral.
It can take months or weeks before a small business is approved and funded. Banks carefully scrutinize owner and business performance and those with strong financial statements are approved.
If you don’t have all of these characteristics, this option might not be an option for you.
2. A Small Business Administration (SBA) Loans
Same as #1 but with more paperwork, time and energy to ever succeed.
These are loans backed by the government from an approved SBA lender. It is exceptionally difficult to secure an SBA loan. Small business owners need an extensive amount of financial data and have strong credit to qualify for this type of loan. Just like traditional bank loans, SBA loans also require a personal guarantee.
This is simply not a quick solution for the business under a cash flow time crunch.
3. Merchant Cash Advances
While these appear to be a viable option to a business in a hurry, these are harmful and should be avoided at all costs.
Whether they are structured using credit card transactions [restaurants, retail, etc.] or can happen in 24 hours without any personal credit check or background investigation, the common denominator is that these are incredibly expensive and are not structured in the best interest of the business. Effective APR [Annual Percentage Rates] for many merchants cash advances can be 35% to 90% a year.
These are to be avoided at all cost.
4. A Business Line of Credit
Small business owners in a cash bind can apply for a business line of credit at many traditional banks, but as is the case with options #1 and #2, these types of loans are rarely funded overnight.
The astute business owner likely has one of these in place and has the financial discipline to only use it in case of an emergency (like what has happened with the collapse of MyPayrollHR). It is important to use a traditional line of credit only when it is needed and not to use it to subsidize operating losses or in effective financial performance.
The worst case is for the business to have done this and have no room left on the line when it is needed to take them through a cash crisis. There is also usually a myriad of fees charged by the bank [line fees, unused line fees, service charges, annual renewal fees, etc.] that the business owner must be cognizant of with this form of funding.
5. Family, friends, outside investors
Many businesses have successfully borrowed from their family, friends and others and been able to honor all of their financial obligations and payments as they grow and expand.
However, if the small business owners embarks on this path to solve a short-term cash crisis, it is important that this makes financial and strategic sense before any money changes hands. To borrow money in a hurry requires that all parties have a clear and written understanding of the terms, conditions, cost and risks associated with this option. Without documenting the borrowing, the business owners sets themselves up for a potential disaster in the future.
I would personally avoid this option and use it only as a last case choice.
6. Factoring your invoices (accounts receivables)
This often misunderstood and overlooked option of selling your B2B* or B2G** invoices to a factoring firm can be the perfect, quick solution to solve a cash flow crisis like what has happened to the clients of MyPayrollHR.
What is factoring and why is it a perfect solution?
Factoring is a proven tool used by business globally. Factoring is nothing more than the sale of B2B* and B2G** invoices at a small discount to face value.
A factoring transaction can happen quickly and gives the business owner immediate access to cash to cover any expenses incurred by their business, including bounced payroll that probably has occurred when firms like MyPayrollHR go under.
Unlike a loan at a bank, factoring is simple, secure and there is no cost to apply for these services with our firm. Preapprovals usually happen in a business day and funds can be in your account within 7 to 10 business days.
The only fees the business owner typically encounter are a fee for the cost of capital and an ACH or wire fee.
For businesses scrambling to recover from a financial disaster like the collapse of MyPayrollHR, factoring can be a strong option for the stressed business owner to consider.
- One-day preapproval
- Peace of mind for you and your employees
- No out of pocket costs to apply or get funding
- Clearly disclosed and fair pricing
- No long term contracts
- No hidden costs
Regardless of which option you select, it is imperative that before you make any decisions, do your homework! Ask the funding source for client references and a clear written cost of exactly what services you have selected. Even if you are in a hurry, make sure you ask questions and never agree to anything when high-pressure sales tactics or bait-and-switch deals pop up.
This is the only safe way to avoid a second financial disaster from happening and get back on the road to financial recovery due to the failure of firms like MyPayrollHR. With a relationship with a professional factoring firm in place, you can stop worrying about your cash flow, the ability to make payroll and start refocusing on what matters most: serving your clients and profitably grow your business.
To learn more about how factoring can help your business cash flow issues, visit our financial solutions page or submit a quick quote.
If you currently have outstanding invoices up to 60 days, fill out our secure online application, at no cost, to see the low rates of unlocking your capital.
*B2B refers to a business-to-business company model where a business sells a product or completes a service for another business. For example, a B2B business could be a staffing company that provides personnel to a warehouse.
**B2G refers to a business-to-government company model where a business sells a product or completes a service for a government entity. For example, a B2G business could be a local lawn company providing its service to the local city hall property.