Redwood City, CA consulting and software firms can use a commercial line of credit to pay staff while client invoices are out on 30- or 60-day terms, drawing only what the gap needs and paying it down when clients pay. Interest runs on the drawn balance. Whiteside Finance routes the request to funding partners; the limit is a partner’s to set.
A credit line carries payroll while invoices are out, charges interest on the drawn balance and can be drawn again after paying down. Examples use invented figures; a funding partner sets the limit and terms.
Payroll timing when client invoices run 30 to 60 days
A services firm pays its people every two weeks but bills after the work is done, and the client then has 30 or 60 days to pay. A commercial line of credit sits in that space: the firm draws for payroll and pays the balance down when the invoice clears.
| Invoice terms | Paydays inside the wait | Payroll carried |
|---|---|---|
| Net 30 | 2 or 3 | $92,000 to $138,000 |
| Net 60 | 4 or 5 | $184,000 to $230,000 |
The count depends on where the first payday falls after the invoice goes out. In this example moving a client from net-30 to net-60 doubles the payroll carried at the low end, which is why the payment terms in a client contract matter as much as the rate on the line.
ZBP 2023 gives 227 establishments under Professional, Scientific, and Technical Services (NAICS 54) a ZIP 94063 address; 54.2% had fewer than five employees, and at that size one late client can decide a payroll week.
Draws, repayment and interest on what is used
A line has a limit, and interest runs only on the part drawn. Each month the firm pays at least the interest on the balance, plus any principal the agreement calls for, and it can pay down more at any time. What is paid down can be drawn again while the line stays open.
| Month | Drawn | Paid down | Balance | Interest for the month |
|---|---|---|---|---|
| Month 1 | $46,000 | none | $46,000 | $431.25 |
| Month 2 | $46,000 | none | $92,000 | $862.50 |
| Month 3 | none | $60,000 | $32,000 | $300.00 |
| Month 4 | none | $32,000 | $0 | $0.00 |
Illustration only, invented figures: two payroll draws of $46,000 take the balance to $92,000, and two client payments bring it back to zero. In this example the four months cost $1,593.75 of interest, and the full $100,000 limit is open again for the next gap.
Line of credit or working capital loan for a services firm?
A gap that repeats suits a line; a one-time cost with a fixed amount suits a working capital loan or a term loan. The difference shows in what each one charges after the client pays.
Illustration only, invented figures: the same $92,000 as a 12-month working capital loan at 13% a year runs $8,217.19 a month, and the twelve payments carry $6,606.28 of interest. In this example that is $5,012.53 more than the line table, because the loan keeps charging after the invoice is paid while the line stops at a zero balance.
A loan can still fit a firm that wants one fixed payment it can plan around, or a cost that has nothing to do with invoice timing, such as new office furniture and computers.
Line reviews, renewal dates and the requirements a partner can set
A line agreement can set a review or renewal date, for example twelve months after the line opens. At that point a funding partner can ask for:
- Year-end financial statements or the firm’s tax return
- An accounts receivable aging that shows which invoices are past due
- Bank statements since the line opened
- Any change in ownership or in the firm’s larger client relationships
- Proof the balance reached zero for a stretch, if the agreement has a clean-up period
A partner can renew the line, change the limit or close it to new draws, and the agreement says what happens to a balance left at that point. A new request starts at (650) 336-2048 or on the request form; more articles sit on the blog.
By Whiteside Finance · Updated
