A lot of business owners have misconceptions around lines of credit and debt. Credit and debit are a necessary part of growing a business. Once debt has been accumulated, it is important to create a system to repay your debt. I will be going over all the ins and outs of taking accumulating debt to grow your business in this episode.
In today's episode we discuss:
- Debt is an advance that affords an opportunity to invest in your business that will give you a greater return.
- How to use debt and learn how to use it effectively.
- Recognizing that there is a great distinction between credit card debt and a line of credit.
- Creating a schedule of repayment as soon as there is any money on the credit card
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Allison Williams: [00:00:05] Hi, everybody, it's Allison Williams here, your host of The Crushing Chaos with Law Firm Mentor podcast. Law Firm Mentor is a business coaching service for solo and small law firm attorneys. We help you to grow your revenues, crush chaos in business and make more money.
Allison Williams: [00:00:26] Hi, everybody. It's Allison Williams here, your Law Firm Mentor. And welcome to another episode of The Crushing Chaos with Law Firm Mentor podcast, where this week we are going to talk about credit in your law firm. So I wanted to talk about this topic because a lot of our clients recently have approached us with the topic of when should I and how should I go about the process of securing credit as I am in a growth spurt in a law firm.
Allison Williams: [00:00:53] So to be clear, I think that there are a lot of people that have a conception about debt, that all debt is bad, unless it is that on a mortgage or debt on some appreciating asset. And I will give you my thoughts on that globally.
Allison Williams: [00:01:11] So the first thing I want to say is that debt has to be used effectively. And I think a lot of people fear debt because they don't know how to use it effectively. Right. You shouldn't be going out and using your credit cards for payroll, right? You shouldn't be overspending or reaching for the stars with fun things that you're going to get for your law firm or a get rich quick scheme. You know, you shouldn't have a mindset that debt gets me something I otherwise can't get for myself. Debt is an advance that affords you an opportunity to invest in your business in a way that will give you a greater return. In other words, I'll put $5,000 on something today that I believe will reasonably pay off $20,000 over some defined period of time.
Allison Williams: [00:01:55] So part of the reason why that is problematic for a lot of lawyers is that if you're not effective at managing your money and you go out and get debt, then you oftentimes will not be effective at managing debt and that can harm you in a host of ways, including your personal FICO score because a lot of debt in small businesses is personal unsecured debt, not all of it, which we're going to talk about today, but much of it is. And if you don't have a willingness to use debt and learn how to use it effectively, oftentimes it just adds to the internal pressure that money issues in a business can already create. So with that caveat, we're talking about effective use of credit in the law firms. We're not talking about frivolous spending or rather spending that is really designed to get you what you want, but really spending that is designed to facilitate your ultimate goals in business, which presumably, if you're watching this podcast, is to grow your business.
Allison Williams: [00:02:57] Let's talk about three strategies I want to share with you around the use of credit in your law firm that can help you to grow your business and that can help you to approach the use of credit in a way that will not create more stress and strain, but should afford you more ease and enjoyment in business.
Allison Williams: [00:03:16] Strategy number one, we have to recognize that there is a great distinction between credit card debt and a line of credit, and that credit cards are easier to secure. Now, easier does not mean better. Okay. When you talk about interest rates, your interest rates on a credit card are going to typically be higher than on a line of credit.
Allison Williams: [00:03:39] Normally, if you go through a banker and you establish a line of credit with your financial institution, you're going to be afforded prime plus some percent to be prime plus 3%, prime plus 2%, prime plus 1% depends on your creditworthiness. But ultimately that debt is going to be a lot less expensive than debt on a credit card. The rationale behind this is that your line of credit should be something that you are borrowing and paying back reasonably frequently.
Allison Williams: [00:04:11] Now, when I say reasonably frequently, I don't mean that you're going to need your credit all the time, but to establish a relationship and a history of positive use of credit, using your line of credit, simply knowing that even if you have cash in the bank, using it and being able to pay it back is going to create a history with your bank and thus grant you likely a stronger access to a higher credit limit in the future.
Allison Williams: [00:04:37] Now, when we talk about credit cards, one of the things that kind of floated around a lot is how should I secure a credit card? How should I determine what is the right credit card for my business? Now, there is a lot online that you can read. I'm not going to go into all the details on this about the different perks that come with different credit cards. There are some credit cards that are all about the travel point, right? You get five X the points when you buy travel on American Express, then you would normally get. So if you're going to travel somewhere, that might be a card that you would elect to use because that perk is going to afford you the ability to buy more travel less extensively in the future.
Allison Williams: [00:05:21] There are other cards that do the same thing with, with required expenses like gasoline or office supplies. So you want to start looking at what are some of the benefits that you can get from the credit card, not just the ability to access the credit, but some of those ancillary benefits that will come with it.
Allison Williams: [00:05:40] Now, the other thing to consider when you're talking about a credit card versus a line of credit is something I mentioned before, which is the interest rate. Over the course of time, your interest rate should be able to go down, but for the most part, it's not going to go down automatically.
Speaker2: [00:05:55] So one strategy that you need to employ if you're going to use either a credit card or a line of credit, is to think about how you can get that interest rate down by using the credit. That usually means that you will have an intentional strategy around running the credit card up and paying it off every month over some period of time. And then if you ever get into a place where you need the credit card but you don't have access to funds, so you can't pay it off right away, you can service it, meaning you can pay the minimum or some higher amount on the credit card and then ultimately pay it off when you can. But the beauty of managing your credit responsibly when you are in a business is that that will increase the likelihood that if you go to your business, credit card holder, you go to that institution and say, hey, I have a relationship with you. I've been using your credit card for X months or x years, etc. Will you consider either increasing the line of credit or lowering the interest rate?
Allison Williams: [00:06:56] Now, increasing the line of credit gives you a benefit of decreasing your income to debt ratio, right? So if I have a card and it has a 9000 credit limit and I have spent $3,000, I've used 33% of my credit. However, if I get them to increase that credit limit to 10,000, my credit utilization rate goes down to only 30%. So I've done nothing other than secure more credit, but that will typically trigger an increase in my FICO score, my credit score.
Allison Williams: [00:07:28] So you get a benefit from doing nothing other than requesting more credit, and you want to get into the habit of doing that in times when you are using your credit responsibly. So when you're in a place where you have extra cash, when you're in that cycle of growth, where you have more revenue and profit coming in than you normally do because you're at a stage where you have compressed your expenses and you've expanded your income and your revenue, that would be a perfect time to reach out, to request more credit, because that's the time when your credit utilization is likely to be pretty strong, right? You're going to pay off your credit or you're going to pay down your credit pretty substantially.
Allison Williams: [00:08:06] Next up, the other the next consideration that you should really think about when you're thinking about using credit in your law firm. Is that with the line of credit, you are more likely to require financial professionals to assist you with that acquisition than you would with a credit card. Or credit card it usually is just going online, filling out an application. Perhaps it's filling out an application through a financial institution. But normally you can get them, you can get them online. You can get them online, whether it is through a banking relationship or just simply going on to a website and filling out your information.
Allison Williams: [00:08:45] With a line of credit, you are normally going to have to have some type of bank or relationship. And the reason for that, is that a line of credit will normally require some level of financial disclosure. You're often going to have financial statements that you will have to provide that could require income statements which, which are also known as profit and loss statements, where the banking institution and some representative there is going to want to look at the health of your business. Right. How much is coming in?
Allison Williams: [00:09:16] Now for a lot of people, that's a triggering thought. Oh, my God, I only make X dollars. I don't have that much. But here's the thing. No matter how much you have at present, it is not so much the gross number that is the major determinant, but rather the profit. How much are you keeping of what you are producing so that when you have investments that you want to make in the next marketing strategy, or the next coaching program, or the next capital improvement of your business, how are you going to fund that? Well, if you fund that through the line of credit and you're growing your business, they see a greater likelihood that that money is going to be paid back than if you are simply stagnant, standing still and trying to use credit to pay basic expenses that you will ordinarily have over and over again.
Allison Williams: [00:10:05] So in other words, the investment strategy is going to be discerned and evaluated when it's time for the application for credit, because for most applications for credit through a bank, they want to know what the purpose of the funds is. So having a relationship with a banker is really key. Having a relationship also with an accountant is really key because your accountant is going to be able to demonstrate your income in ways that are going to increase the likelihood of you getting the line of credit.
Allison Williams: [00:10:33] Now, when I say that I don't want any financial professionals to come after me and say, that sounds like you're talking about cooking the books. We're not talking about cooking the books. We're talking about casting income in a way that demonstrates a greater likelihood of your ability to pay the funds back.
Allison Williams: [00:10:53] So here's an example. I have looked at many, many income statements for my clients over the years. One that sticks out in my memory was someone who actually had a lot of personal expenses being run through the business. And so we looked at all of the personal expenses, and this person had to be clear. We're talking about a lifestyle business, right? This person wasn't in a high accelerated growth business. They were looking to grow their business. They had just started that process and they wanted to get a line of credit at this time for a very specific reason. But when we look at the profit and loss statement, the person had identified through the value of a really good accountant, all of the expenses that were personal in nature that increase that person's income.
Allison Williams: [00:11:38] Now, you might argue, well, what difference does it make that those expenses were itemized, whether we say is 100,000 to John Doe or we say it's 50,000 to John Doe, but 50,000 in additional expenses include the car, and a house payment, and a boat payment and so forth. Well, the reality is, if your base income on payroll is not the totality of your income coming from the business you have draws from the business will draws or something that you can select out of. Right. Very differently than payroll because you are expected to receive a compensation, whether you are an S Corp, an LLC, a personal corporation, sole proprietorship, doesn't really matter how you function. A business banker, a banking institution is going to presume that you will be compensated to work in your business. And so how that compensation shows up is going to be very persuasive to them under certain scenarios, less persuasive in others.
Speaker2: [00:12:38] So if I have a whole bunch of expenses that I'm running through the business, some of those expenses, I can easily make the case that they are negotiable, right? Maybe I just happen to take a large chunk of money in cash out of my business last year, but because I had extra money sitting in the bank, if I don't have extra money sitting in the bank, I won't take that money. Right. Because it's not there. Very different than if my payroll income is a part of a profit and loss statement. So how that looks and what type of argument your banker is going to make for you is going to be premised upon what the data shows and how the data appears on your profit and loss statement is something that is really guided by your accountant or to a certain degree, your bookkeeper, and how they have passed the items on your chart of accounts. So you want to have that financial team present so that they can really help you to show your income in a way that is likely to achieve your objective.
Allison Williams: [00:13:33] Third and final thing I want to talk about when we talk about business credit, and it really is that when you are using either credit cards or line of credit, you want to create a schedule of repayment as soon as there is any money on the credit card.
Allison Williams: [00:13:50] Now, that might sound foreign to some of you. So let me talk to you a little bit about what I am really covering. But what I see a lot with lawyers when they are using credit in their law firms is the idea is that I don't have enough in this moment, so I will use the credit card to pay some necessary expense and I'll pay it back later.
Allison Williams: [00:14:11] But the reality is later rarely comes. And it's not because the law firm owner is irresponsible. It's not because they don't know that the debt is there, is that we get lulled into a false sense of security that later will always be available to us. And so we service the debt by paying the minimum. Some of us will pay more than the minimum, but we're certainly not paying it off. We're paying it down. And then some other expense comes and we put that on the credit card and then we're paying that down and then some other expense comes and we're paying on that, and then we pay it down and so forth.
Allison Williams: [00:14:45] If you want to make sure that you're not just increasing your spending capacity by virtue of having credit, but you're also increasing your access to credit by using credit, right? Because it's not just what you have today, but you have the ability to gain access to when you need it.
Speaker2: [00:15:03] Then you want to make sure that as you are putting any type of expenditure on your credit card or your line of credit, that you immediately create a schedule to pay it down. And this tends to give us a greater sense of ease and comfort that using our credit is something that we can do responsibly and in a way that is going to increase our business success. So instead of having that kind of ticking time bomb that says, Oh God, I've got this debt over here, it's incurring interest on my goodness, oh my goodness. You can say, okay, I put this money on this credit card. Now let's look at over the over what time we're going to pay it back.
Allison Williams: [00:15:03] And don't give yourself an absurd goal that you could never hit, right? If you just put 10,000 on your credit card and you didn't have that 10,000 in the first place, to say you're going to pay all 10,000 back next month, probably not realistic, but maybe 2000 a month over the next five months is realistic. Or maybe as you are projecting your cash flow going up, that's a different discussion for a different day. You all should be doing cash flow projections, but if you aren't and you are just reasonably thinking ahead, okay, we have started to see an uptick in the number of people who are calling firm. We are starting to convert at a higher rate. I expect that I'm going to have an additional one client per month over the next three months and one client is worth a $5,000 retainer to us. Then that's 15,000 and we have 10,000 right here.
Allison Williams: [00:16:28] Well, we know that all 15,000 is not likely to go to that debt, but maybe you want to put 5000 a month toward that debt so that it's paid off in two months. Maybe you want to put 2000 a month over five months, but you want to have some plan to pay it off so that as money comes in, it has a place to go, right? You want to give your money a job before it even gets here. Every dollar that comes in needs to have a place to go. Is it going to an ongoing expense? Is it going to an investment for future growth? Is it going to pay down debt? Right. You want to have that plan in place and the more you put those plans in place, the better you will be at keeping yourself stable financially, keeping your growth plan managed effectively, and most importantly, reducing the stress associated with money in your law firm.
Allison Williams: [00:17:20] All right, everyone, I'm Allison Williams, your Law Firm Mentor. This week we have been talking about credit use in law firms. I'll see you on our next episode.
Allison Williams: [00:17:35] Thank you for tuning in to the Crushing Chaos with Law Firm Mentor podcast. To learn more about today's show and take advantage of the resources mentioned, check out our show notes. And if you enjoy today's episode, take a moment to follow the podcast wherever you get your podcast and leave us a rating and review. This helps us to reach even more law firm owners from around the country who want to crush chaos in business and make more money. I'm Allison Williams, your Law Firm Mentor everyone. Have a great day.
Allison C. Williams, Esq., is the Founder and Owner of the Williams Law Group, LLC, with offices in Short Hills and Freehold, New Jersey. She is a Fellow of the American Academy of Matrimonial Lawyers, is Certified by the Supreme Court of New Jersey as a Matrimonial Law Attorney, and is the first attorney in New Jersey to become Board-Certified by the National Board of Trial Advocacy in the field of Family Law.
Ms. Williams is an accomplished businesswoman. In 2017, the Williams Law Group won the LawFirm500 award, ranking 14th of the fastest-growing law firms in the nation, as Ms. Williams grew the firm by 581% in three years. Ms. Williams won the Silver Stevie Award for Female Entrepreneur of the Year in 2017. In 2018, Ms. Williams was voted as NJBIZ’s Top 50 Women in Business and was designated one of the Top 25 Leading Women Entrepreneurs and Business Owners. In 2019, Ms. Williams won the Seminole 100 Award for founding one of the fastest-growing companies among graduates of Florida State University.
In 2018, Ms. Williams created Law Firm Mentor, a business coaching service for lawyers. She helps solo and small law firm attorneys grow their business revenues, crush chaos in business and make more money. Through multi-day intensive business retreats, group and one-to-one coaching, and strategic planning sessions, Ms. Williams advises lawyers on all aspects of creating, sustaining, and scaling a law firm business – and specifically, she teaches them the core foundational principles of marketing, sales, personnel management, communications, and money management in law firms.