Wendy O’Donovan Phillips, is CEO of Big Buzz, an agency driving focused marketing efforts for executives and teams nationwide.
Let’s say yours is a firm that earns $1 million in annual revenue, and you borrowed $100,000 to weather the 2020 economic storm. Over the next few years, you would very well make payments and become a debt-free agency.
But what if you had borrowed almost 70 times that amount?
In “Dukes of Moral Hazard” in the June/July 2020 issue of Forbes magazine, writers Antoine Gara and Nathan Vardi pointed to big companies like FedEx and Exxon Mobile that were “gorging on debt, some recklessly.”
As marketing agency owners pull through the economic hardships posed by the recent closures and slowdowns of client companies, many of us have increased debt-to-income (DTI) ratios. As the SBA defines it, “A DTI ratio is calculated by dividing your total monthly expenses, including loan payments, by your gross monthly income. A high DTI percentage suggests that you may have too much debt in relation to your income.”
To safeguard our team and future, my agency secured a corporate line of credit, funding from the Paycheck Protection Program (PPP) and additional monies from the Economic Injury Disaster Loans (EIDL), totaling $238,550 in loans — all in the former half of 2020. Contrast this with our typical benchmark for borrowing power: $140,000 in an open line of credit, or roughly 10% to 15% of revenues.
In my 13 years in this business, I have found 10% of revenues to be a safe minimum for borrowing power, and we match it with 10% of revenues in cash on hand. Should we suddenly lose a large account or face any other unexpected adversity, we are protected during short-term recovery — by both our cash and available credit.
In fact, I am so protective of how we use our credit that my accountant and leadership teams both had to remind me this past spring that these funds are for emergencies, and 2020 brought the biggest emergency our business would likely face in its history. Indeed, it was time to dip into the rainy-day jar.
For that reason, I made the choice to increase our borrowing power by 1.7 times our standard given the uncertain road ahead and the sheer availability of funding. (Money is cheap right now.) Not reckless, necessarily, but still, that’s quite a leap. As the borrower, I assume all the related risks. What’s more, as the principal of my firm and sole owner, I am personally responsible for paying back that hefty sum in the unlikely event my business should fail.
Agency owners get the full spectrum of feedback from coaches and consultants on this matter. A past consultant of mine drilled into me so firmly the idea that an agency should never borrow that I once went without a safety net for some time after working with him. It made me want to break out into hives. Alicia Marie of Peoplebiz, Inc., my long-time business coach, has always advocated me to borrow to grow. It has served me well. When I completed the SBA’s Emerging Leaders program, the panel of experts assigned to my group suggested the setting of S.M.A.R.T. goals in order to make financial decisions from that foundation. I found the process cumbersome.
Overall, taking on debt is a deeply personal decision dependent upon one’s own financial and business philosophies as well as level of risk tolerance.
The point is we can get into a lot of trouble if we don’t safeguard our firms in alternative ways, and that’s not just through borrowing power. While I have secured this funding, I have not yet used it aside from covering a portion of payroll and rent from April through July with the forgivable percentage of the PPP. The remaining sum sits in the corporate checking account, ready if we need it.
We won’t likely need it. We are now at 109% of our adjusted revenue goal year-to-date because we added certain additional safety nets, such as:
• Encouraging client renewals
• Encouraging client upsells
• Stoking referrals
• Reengaging past prospects with a solid outbound sales strategy
• Nurturing regular readers of agency content marketing to become warm prospects
• Engaging each member of the agency leadership team to laser-focus on applying their areas of expertise to the above initiatives
All this to say, I have learned three borrowing principles over the years that other agency leaders may find instructive:
1. Keep a close eye on your DTI to prevent overborrowing.
2. At the end of the day, to borrow or not to borrow is a choice only you can make. It’s not a decision to outsource on any level, even to trusted advisers. Consider the data and go with your gut.
3. A relationship with a bank of record is critical.
Here are a few key questions to consider in guiding your own borrowing philosophy:
• What is your current DTI, and what is your goal DTI?
• What percentage of your revenues do you believe is a safe minimum for borrowing power for your firm?
• With what local or regional bank might you be able to build a long-term working relationship to open up more long-term borrowing opportunities?
On the tightrope walk that is agency ownership, I hope that you shall never fall. The reality is that we all take tumbles from time to time. May the available credit safety net be ready for you, and may you have several more layers of safety supporting you.
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