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Will My Loan Cover My Salary?

If you want to quit your job to start a business full time, a loan can help cover not only your operating expenses, but also your salary.

Opinions expressed by Entrepreneur contributors are their own.

Q: I am considering opening a café, but I am not sure whether I will be able to quit my current job and become a full-time entrepreneur. If I held my current position and hired a full-time manager, would I be able to account for his and my salaries in my business plan so the loan would cover them? If not, and I decided to work at the café full time, could I work in my first year's cost of living?

A: Plenty of new entrepreneurs divide their time between a traditional job and their fledgling business, and in many cases, this simply makes good economic sense-it helps you keep some money flowing in while your business is getting started. But if you have adequate funding, you can certainly work full time in your new business from the very beginning.

But can you pay yourself? Yes, if the funding is there. According to the SBA, operating expenses, besides equipment, raw materials and staff payroll, "include your salary as the owner and money to repay your loans." Having said that, one major caveat is that you must be cautious in the amount you pay yourself. Once you've paid off your small business loans and your venture capitalists have long since cashed out, what you pay yourself is your own business, but until that point, your salary will be the subject of a great deal of scrutiny.

Whether you work full time in your company, hire a full-time manager or do some combination of both will depend on a lot of different factors. The most important factors in setting your salary (or determining whether you even get one) are: 1) where your funding is coming from, and (2) how much they are providing. A financial institution issuing an SBA-backed loan may have one set of expectations about your involvement, while a venture capitalist may have a whole different set of requirements. If you're being financed by friends and family (which is a lot more common than you may realize), you'll face a whole different set of pressures and expectations. If your financing is coming from multiple sources, expectations may conflict, so it's important to get it straight from the very beginning.

Most business plans involve setting out at least your first few years' operational expenses, which include salaries for yourself and your staff and management. Depending on your situation, your financier may even expect you to work without pay until the business becomes profitable.

In most cases, however, you can build a salary for yourself into the business plan. Having said that, however, realize that a business plan is a constantly evolving document, and the amount you initially specify may be subject to adjustment and change by those who are putting up the capital. Most venture capitalists will tell you that the biggest mistake an entrepreneur makes in the business plan is building in too large a salary for himself or herself in the first few years of operation. There are no hard-and-fast guidelines about how much you can pay yourself, and it may be tempting to list your own annual income in the six figures. You must resist that temptation. No venture capitalist will offer funding to someone looking to dip too deeply into the seed capital for his or her own paycheck. Be prepared to pay yourself as little as you can stand to live on-in the long run, once your business has become successful, the money will flow.

A note for readers who may be getting funding from minority loan sources: If you are getting this type of financing, you will need to be very active in the business in order to get this type of loan-and in most cases, you will need to work full time in the business.

Janice Bryant Howroyd is founder, chairman and CEO of Torrance, California-based ACT-1 Group, the largest woman minority-owned employment agency in the United States, with more than 70 offices, 300 full-time employees, 65,000 temporary "stars" and annual revenues exceeding $500 million. Founded in 1978 around Howroyd's personal philosophy of "Keeping the Humanity in Human Resources," ACT-1 is today a multidivision conglomerate serving such clients as Ford Motor Co., Gap Inc. and Sempra Energy and meeting demands for well-educated and well-trained temporary, full-time and contract employees. She has twice been honored by the Star Group as one of 50 Leading Woman Entrepreneurs of the World.

The opinions expressed in this column are those of the author, not of All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.