Business Line of Credit

[kiki1984]

I have irregular income. For 20 years I've had my own business and it has been impossible to forecast monthly income. I could receive 20% of my income in January, nothing for 2 months, then 30% in March, etc. As a result, it makes it very difficult to budget and plan. Since I have been in the business so long it is very easy for me to do 2 things:

1. estimate the annual gross revenue for the business
2. determine my business expenses and personal expenses (needs) - I keep very good records in Quickbooks

I always have stress because as you can imagine personal expenses remain about the same each month but I might not be getting in the income from my business to pay myself enough to meet those expenses. I'm not a believer in taking on debt and my revenue always exceeds my expenses so I'm wondering if using a business line of credit would help ease the stress.

For instance - just using round numbers. Let's say my gross revenue for my business is $120,000. Business expenses are $20,000 for a Net Annual Revenue of $100,000.
My personal expenses (including mortgage, school loan, utilities, groceries, etc.) are $7,000 per month for a total of $84,000.

Wouldn't it make sense to consistently pay myself @ $8,000 a month from the line of credit? that way I can budget and worked off a set number? Is there something I'm missing? Am I overthinking this? When receivables come in I pay back the line of credit. $8,500 x 12 = $96,000 so I know for sure I'm under my Net Annual Revenue of my business.

The way I do it now is I have a ton of transactions back and forth between business and personal. And I'm always on pins and needles waiting for customers to pay me (and they are late many times).

Any suggestions or thoughts would be appreciated but I'm thinking this is a good example of what a business line of credit is for.

thank you

[disneysteve]

Welcome to the site.

If you have a pretty dependable annual revenue, I don't see why you would need to rely on debt to pay your bills. You should be building a reserve during the high-income months that you draw from during the low-income months. If you get 20% of your income in January and 30% in March, you should be drawing 20% of your annual salary in January and 30% of it in March. Spend your 8K/month and keep the rest in savings for the lean months.

[kork13]

I'm not a believer in taking on debt ... I'm wondering if using a business line of credit would help ease the stress.

These statements are contradictory.

Yes, many businesses (big and small) use lines of credit to support their payroll....but that doesn't mean it's smart. What that says to me is that they're running their books too close to the wire, without sufficient margin. Also keep in mind that as a small business, you're almost assuredly required to guarantee this LOC yourself -- personally, not the business. You can call it a "business LOC" if you want, but when you sign the papers, it'll be your personal name & SSN that will be on the paperwork -- not your business & its EIN. For all intents & purposes, it's a personal LOC. And you don't believe in taking on debt.....soooo......

I'd challenge you to build a business reserve to get you through your lean months -- savings held back within the business account. Doing so will give you the same effect as having a line of credit, except you get to earn interest on that money instead of paying interest. Talk to your tax person, I believe there are also some mild tax benefits to doing this (my very general understanding is that you can delay paying taxes on that money).

Alternatively, follow the plan that DS lays out, or perhaps simpler, pay yourself as a percentage of your net profits. Either way, you do basically what I said above, except within your personal accounts. Maintain a strong cushion of funds to cover your low months, and build it back up on your high months.

[disneysteve]

We all recommend everyone have at least a 6-month emergency fund. Suze Orman recommends 8 months. In your case, 8-12 is probably what you ought to have. How big is your reserve currently (business or personal)? I'm guessing it's small or you wouldn't be asking. Make your savings account your own personal line of credit. Draw from it when income is low; replenish it when income is plentiful. As long as the business is doing well overall and the income is there, just not coming in in a linear fashion, this shouldn't be a problem.