Lines of Credit, Loans, and Other Lifelines

This post is one of a series of articles about “Closing Shop,” lessons learned from my 19 years founding, owning, and operating a small business. Read more of my story here. To see other posts in the series, click the “Closing Shop” category link in the sidebar, including the first post here.

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There’s a myth that entrepreneurs and small business owners are people who love risk. Actually, we don’t. We assume risk, sure. But mostly, we try to mitigate it. We do everything we can to make sure our next venture or product offering will be successful, fully aware that not everything we try will be. We’re good at making minimum viable products and building out from there. We do our best to fail fast rather than fail big.

So when I see the government rolling out Small Business Administration (SBA) Disaster Relief Loans, my “Hey, wait a minute, let’s think about that” antennae get activated. What risks may be hidden amidst the assistance?

Even in times of severe economic stress, it’s important to keep thinking.

Let me say from the outset that I am not at all suggesting you not take advantage of what the government is offering, or any other relief opportunity. These are dire times and right now, the goal for many if not most businesses of any size—corporations and small businesses alike—is survival. Furthermore, as of this writing, it seems Congress is moving toward forgiving any loan proceeds—that is, making them grants—if the proceeds are used to fund payroll and leases. Much of what I say below may not apply.

Even so, I want you to have additional perspective.

My business partners and I were notoriously conservative as we expanded and funded our business. We were not backed by venture capitalists, so every dollar we invested was our own money. Real money. Real skin in the game.

Over the life of our business, I believe we took one, maybe two, SBA loans. They were very helpful. They were not Disaster Relief Loans; they were business expansion loans. We had to promise to create jobs in exchange for low-interest money. We did. We made the promise. We kept the promise. We were growing, the economy was growing; those loans were good deals for us.

As we grew, we had more payroll and operating expenses to fund. At the height of our company, we had over 70 employees, four locations, and a bunch of freelance writers, editors, and designers working for us. Our projects were large, they extended over many months, and although we built payment milestones into client contracts, the milestone payments varied in size and timing. If a client delayed a project, the corresponding payment milestone was also delayed. Our biweekly payroll, however, was never delayed. Its only variation was in the amount of overtime we paid to our hourly workers and whether it was a two-payroll month or a three. Our employees expected to be paid every two weeks, our landlords expected to receive their rent on time, and our other vendors expected us to honor our commitments to pay them.

So we made what seemed a prudent business move. We applied for—and got—a business line of credit (LOC). After all these years, I don’t remember if the LOC was for $900,000 or $950,000 (you’d think I would remember that!), but it was enough to fund about three months of payroll, lease payments for all four locations, and other essential business expenses.

Before the Great Recession, we used that line of credit exactly as an LOC is intended to be used: sparingly and short-term. We rarely tapped it, and when we did, it was to cover a one- or two-week gap between client payment and a major expense, like payroll. We took the minimum amount needed to cover the expense and we paid the full amount back immediately. That is how you’re supposed to use a business LOC.

Things began to change as the Great Recession lingered. Our business was in educational publishing; we designed, developed, and produced educational materials like textbooks for such major publishers as Glencoe/McGraw-Hill, Pearson, and Houghton Mifflin Harcourt. Historically, we had a mix of projects underway or in the pipeline: reprints, corrections, and other modifications of existing texts in various subject areas such as social studies, language arts, and math; and new, updated, or state-specific editions of textbooks for whatever adoption cycle was coming next.

State and local governments fund textbook purchases. Because of the Great Recession, state and local government budgets were severely curtailed. Textbook adoptions were canceled or put off. So our clients began stringing out current projects or reducing their scope. New projects were being postponed indefinitely. What we considered “old” projects—reprints, corrections, some customizations—were about the only projects that remained. Their budgets were small and their timelines were short. We were thankful to have the work, but that reduced volume of work could not sustain the company as it was structured at that time.

So, as you might guess, it became more challenging to meet payroll and other expenses. Unlike the current situation, where every single person in the world is affected and the immediate consequence of mass quarantine is obvious, we weren’t entirely sure what to do. Nobody could tell when business would pick up. We knew that when it did, we would have to ramp up immediately and begin producing pages on very tight timelines. We were hesitant to lay off our staff not only because we genuinely liked and valued every person, but also because each had specialized skills and a “knack” and temperament for the kind of work we did. Letting any individual go would leave a gap likely impossible to fill without a significant amount of technical training. With our clients consistently telling us that the work was likely to come “in the next three months,” we didn’t lay off people immediately. Perhaps we should have.

We began to rely on the LOC more than we ever had. It became more difficult to pay it off in full. We began to carry a balance. We even maxed it out.

My business partners and I did everything we could to stretch our revenue and curtail expenses. We closed offices and enacted layoffs. My partners and I forsook salaries for almost a year and two of us took out personal loans to keep the company afloat. We even accepted—reluctantly but gratefully—the offer of loans from several key employees as well as their offers to defer a paycheck on occasion when things were really tight.

We all believed in the company. We believed in each other. We believed in our customers. We believed in our work. We believed in the economy. We believed the Great Recession wouldn’t last as long as it did.

But it did.

I share all of this with you not to discourage you, but to help you make your funding decisions thoughtfully and carefully. If the monies you accept are grants and gifts, your decision is difficult but not really complex. If you decide to accept it, use the money wisely, and do everything in your power to honor the trust that’s been placed in you. (Although I will say that accepting loans or salary deferrals from others will change the dynamics of your relationship with them, ever so subtly. It will also change the way you make your subsequent decisions.)

I said above that at the time of this writing, Congress is considering converting these loans to grants if certain conditions are met. Even so, ask yourself what would happen if these loans were, in fact, loans. That you have to pay back. Perhaps immediately, perhaps over the next thirty years. If your business was on the same track as it had been pre-shutdown, would you have been willing and able to take on the equivalent of a student loan, a McMansion, or a vacation home? Those payments will come due, and could become a long-term expense.

In any case, do not assume the economy will come back quickly. We’ve slowed down the entire system and systems sometimes take a while to ramp up. Look at your current business model. Is your product or service a high-consideration sale, meaning it takes your customers a long time to review your offering and make a decision to buy? You might want to add a month or two (or three) to your projections. Are your sales directly or indirectly downstream from federal, state, or local government? While the coffers may be wide open today, government spending may be significantly tightened once things start rolling again.

What underlying internal or external problems do you need to address in your business? Every business has problems. Are yours significant enough that they affect the solidity and viability of your enterprise? Getting a chunk of money from your bank, state government, investors, or believers-in-you won’t fix them. Resolve to address now what you’ve been too busy, too scared, too cheap, or too proud to tackle. If you don’t have the will or the means to resolve them, think seriously about closing now. Before you get in any deeper.

What additional stress will borrowing this money have on your family? Not just in terms of paying the money back, but in potentially adding tension to your relationships? If you are operating a family business, how will your actions now affect the next generation, assuming you intend to pass down the business to your children? If you are the matriarch or patriarch of the family business, are you making decisions unilaterally or are you involving the next generation? What conversations are you having? What conversations do you need to have? What conversations have you been avoiding?

Funding your business is a major, major decision with long-term, often unforeseen consequences.

Once again, I’m not suggesting that you not track down and take advantage of every lifeline available to you. I am merely suggesting that you think.

Think, think, think.

Take a look at the video below. One of our local news stations posted this interview earlier this week. What questions come to mind as you watch it?

On a separate note, Steve Blank, someone I follow pretty closely, posted two articles that may generate some ideas for how to manage cash flow. Although his area of expertise is tech startups, he makes some suggestions just about every business owner can apply or adapt to their own situation.

• The Virus Survival Strategy for Your Startup
• Action Today for CFO’s

Keep holding tight. And keep thinking. You are going to get through this. You are.