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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.
Click here to read the full article by Big Buzz CEO Wendy O’Donovan Phillips.