We recently got a loan from the bank, and Erik is pretty excited about it. In episode 178 of The Journey to $100 Million Podcast, listen in as Erik explains our reasoning behind extending the line of credit for our business. We already had a line of credit for $25k, and rarely used it. We would borrow a thousand here and there, and pay it back very quickly – but did not necessarily need the line of credit. But, the point is that it’s always there if we need it, and every time we use this money and pay it back, we are building up credit.
We recently got this credit line extended, which is the loan that Erik is speaking on. We now have a $75k line of credit. We are not tapping into it anymore than we have in the past, but it obviously gives us more padding in case we need it for certain situations. The main reasoning for getting a line of credit is for cash flow purposes.
For instance, let’s say you do a bunch of work for a client and complete it before you can even invoice the client. A lot of companies invoice using what’s called net terms. Say a contract is “net 30,” that means the moment Erik gives a client the invoice, they have 30 days to pay it. If you use net terms, that means that you are continuing to fund work until the client pays you back. So, you are putting out a lot of funds, and then you are waiting to get paid, equalling a cash flow problem. This is where a line of credit can be very helpful, but that is not why we extended our credit.
The reason we extended our line of credit is because we wanted to hire a salesperson before our PnL (profit and loss) allowed us to do it. If our company were to grow organically, then we would wait until we had enough profit every single month on a consistent basis, and that profit would go towards the new hire. Additionally, this salesperson we wish to hire should be a positive return on investment. In other words, however much we are paying for salary, that person should bring in more than that amount in revenue. That’s unlike a typical employees who, realistically, are expenses. You want to minimize expenses, but when it comes to an investment and someone that is going to return money, you want to maximize that. Because of this, we wanted to get a salesperson in place as soon as possible and before our cash flow organically allowed it, hence the reason we extended our line of credit.
We have not tapped into this extended line of credit yet, it is there just in case – everything is looking good. Having this safety net in place gives Erik and Array Digital a sense of security. If you do not already have a line of credit, talk to a banker. It is easy to set up, and doesn’t cost anything (unless you’ve had a balance for a long time.) This credit can give you comfort, while also helping with cash flow.