We Scored Ourselves a Nice Line of Credit (Finally) + Other Accounting Advancements

Remember that inventory cash flow post I always link to? You know, the one where I basically concluded:

Is there any solution to this problem? Yes, there is, and we personally know several e-commerce companies that no longer have this problem. Their solution: they have a shit load of cash.

This year we’ve seen good progress towards accumulating that “shit load” of cash. As we keep going further and further above our estimated monthly break-even point, the fixed expenses become more and more negligible and we’re able to profit more and more. Still, the more capital we have access to at any given point in time, the better. You never know when an opportunity will come along where you can put that money to good use. It might be a new line of products, an enticing acquisition, or we might just want to accelerate growth with more marketing or more employees.

Mike took over accounting at the beginning of the year and has made a number of huge advancements.

The largest one, as you can tell by the title of this post, was landing us a large line of credit with our local bank, Citizens Bank. Previously we had a small line with them, and we used that in conjunction with our cash and cards like the (awesome) AMEX Plum to buy inventory. As we’ve become more and more profitable, the need for a larger line has become less and less. Of course, that’s when it became easiest for us to get it. Mike did all of the leg work (it was a lot of back and forth). Ultimately we were able to more than double the size of our existing line. Do we need it? No. Does it change much? No. Is it nice to have it? Hell yes.

This was probably the 10th line of credit we’ve applied for. Here’s a summary of what I’ve learned:

  • Banks don’t care all that much about your revenue/profitability. They care much more about assets. If we were unprofitable and smaller but had large valuable houses, or if we owned our warehouse, we would have had a much easier time. Also, inventory doesn’t count as an asset.
  • Banks always make you personally back everything. Such is the case with most stuff we’ve done.
  • Banks always want the SBA to back their line so that they have even less risk. Everything involving the SBA takes forever and is a total pain in the ass. Thankfully this line was an extension of an existing one so we didn’t need to jump through all of the hoops again.

In addition Mike has made some other huge accounting advancements this year. Learning something new is a big task in and of itself, especially with how busy we all are. Taking what we had and making it much better in such a short time has been really impressive. The simplest was switching to printed checks and double-window envelopes (like these) to eliminate hand-writing of checks, something we had previously been doing. One of those things that saves a few minutes here and there, but compounded over the course of months/years is a drastic improvement, not to mention the elimination of writing errors.

Maybe the most interesting accounting advancement has been his discovery of a little-known feature to automate direct deposits without using a payroll service. Back in ~2007 we used a payroll service for a while and it was a disaster – way overpriced and they messed up a tax filing for us. After that we went to just using regular checks. I had been pushing for a while to get us back to using some sort of payroll service again. It’s a pain for everyone to have to regularly go to the bank. It’s not something that future employees would look at as a perk.

Mike brought it up to our accountant and he mentioned that he had a client using automated direct transfers from business to personal accounts. That’s the tricky part – business to personal. Make that too easy and fraud would be rampant. Mike called our bank over and over again to finally figure out how to set this up. It was a bit of a pain. There are different rules for people who bank with Citizens and for those who use an external bank (there’s a small fee for external banks too). But now it’s all set and we all get our checks deposited automatically…and he doesn’t have to cut a bunch of checks every two weeks. Supposedly most major banks have this feature but most people I’ve talked to had never heard of it like us. It’s not a full-fledged payroll service, but it’s a great option for small businesses like us that don’t need all of that advanced functionality and don’t mind filing our own payroll taxes.

6 comments on We Scored Ourselves a Nice Line of Credit (Finally) + Other Accounting Advancements

  1. Dale says:

    Thanks Adam, interesting to see how things work once you get profitable. 🙂

    One suggestion for the blog, would cool to have a “like” button. A lot of times I enjoy your post but don’t really have anything to comment on. Would love to give you that feedback without having to post just “Cool thanks!” or something like that.

    • Adam McFarland says:

      Good call Dale. I had planned on adding those buttons when I revamped the theme but kind of forgot about it. Just added a Tweet, +1, and Like button. Thanks for subtle push!

  2. Rob says:

    Awesome news. That sure is going to make things easier should you wish to take up a new opportunity at short notice.

    Looks like Citizens Bank is part of RBS – I thought I recognised the logo! What’s SBA though? Some kind of society/community?

    Also – I can’t believe you’ve been having to make payments via cheque… that’s absolutely crazy in this day and age. I’ve just paid ourselves, our expenses and our employees from my couch using BACS/CHAPS/FPS (instant direct deposits set up using internet banking) and have done forever. We can set recurring payments too, so no need to do things like wages monthly unless there’s a particular reason. I guess maybe things operate differently there, but here everyone has an account number and sort code (bank branch reference) and you can transfer money to someone (personal-personal, business-personal, business-business, personal-business) just by knowing those. It’s completely taken for granted by everyone and I’d never even considered that any modern banking system wouldn’t have such functionality!

    Good work on the social media buttons. I’ll be using them…

    • Adam McFarland says:

      Oh, let me tell you about the SBA 🙂 It’s the US Small Business Administration http://www.sba.gov/ and they basically grind your business to a halt while you submit mountains of paperwork just to get funding…that needs to be paid back…and that you need to personally guarantee. All banks use them as a crutch so they don’t actually need to take on risk. They can just use the SBA money for all business loans. Which of course adds a ton of red tape to an already complex process.

      here everyone has an account number and sort code

      We have those too, but there is unfortunately more work to just send money from one account to another online (at least from my experiences when it relates to business accounts). We needed to verify deposits like with PayPal before we could even set up the “link” between two accounts. Also it’s not that it was that difficult once we knew what to do, it was just that the features were really hidden and not documented. Presumably to make it more attractive for people to use their payroll services??

  3. Jake says:

    Why is a payroll service such a pain?

    I used Surepayroll for my startup for about 2 years and that was dirt simple, robust and cheap. Never had any issues with it either.

    For me the issue was not cutting checks but doing all the tax withholdings was a major headache, and I was glad to outsource that to an online provider.

    If you do a direct transfer how do you do withholdings? Or are these profit distributions instead of pay checks?

    • Adam McFarland says:

      Hi Jake –

      Thanks for commenting. As I mentioned in the post, we did not have a good experience with a payroll service (messed up a filing), nor have a few other business owners I’ve spoken with. Also as I mentioned above, I was all for revisiting it – obviously to your point there are good payroll services out there – but our accountant suggested this solution instead.

      We use this for both our profit distributions and our pay checks. I believe that the withholdings are calculated using a spreadsheet, updated yearly as laws change (assuming this is how most companies do it…), and that our accountant actually does the filings for us. As we get bigger, yes, a payroll service will likely be necessary, but for now the pain point wasn’t calculating withholdings every once in a while (our pay doesn’t change all that often, neither does our employee’s) it was the physical cutting of the checks, so this was a better solution. Less set up time, less expensive, works with our existing banking systems.

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