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Business loans for consulting companies
How to get the funds your consulting firm needs to stay fresh and competitive.
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As the owner of a consulting company, it’s your job to stay on the cutting edge of business trends. And with such a fast-growing industry, you need the flexibility to face new challenges every day.
When you need to jet across the country for a client, move to a bigger office or pay for a new marketing campaign, a business loan can help you cover the upfront costs while you wait for the money to roll in — sometimes called a professional business loan.
What loan options are available for consulting companies?
- General use business term loans. Your firm can use these loans to cover any large one-time cost like a marketing campaign or buying software for your team.
- Business line of credit. This type of financing works similar to a credit card but with higher limits, lower APRs and a longer schedule. A business line of credit is designed to cover ongoing and one-time expenses. It can also be used as payroll funding to make sure your staff gets paid on time if the client pool briefly dries up.
- Invoice factoring. Sitting on some big invoices from large companies? Those can take up to two months to go through. Invoice factoring lets you access those funds early by selling the invoices to a third party for a percentage of their value — usually around 80% to 95%.
- Invoice financing. Like invoice factoring, this option gets you access to your client’s invoices to fund overhead costs or a new project. But instead of selling them off, invoice financing lets you borrow against your firm’s invoices and repay it plus a fee of around 2% to 5%.
- Business cash advance. Also known as ACH cash advance, this option gets you an advance on future client payments. Your lender multiplies your loan by what’s called a factor rate — usually between 1.16 to 1.5 — which you pay back through automatic withdrawals from your business bank account when the money comes in.
- Commercial real estate loans. Need a new office? Commercial real estate loans can help break up the cost of moving to a new space to wow prospective clients.
- Equipment financing. Computers and other high-tech office equipment that your firm needs to operate can add up. An equipment loan or lease can help you cover the cost of these items at a lower rate than a term loan — they’re often backed with the products as collateral.
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How to decide which loan offer is best for my business
First, figure out how much you need to borrow and what it’s for. Need funds for overhead expenses if a payment gets delayed? Come up with a liberal estimate of how much you might need. This will help you narrow your search by loan type and amount.
Next, make sure your business is eligible. Banks can have stricter eligibility requirements than other lenders, and if you’re applying for a large amount of funds, your business will need to bringing in a high amount of revenue each month. You might have trouble qualifying if your firm is less than a year old or doesn’t have a positive cash flow.
Once you’ve found a few lenders you’re eligible for, compare the costs. For factoring and financing, this means comparing fees. Otherwise, you’ll want to look at your loan’s APR, which is a representation of the loan’s interest and fees as a percentage.
Your APR and loan term — the amount of time your business has to pay off your loan — determines two things: Your monthly repayments and your total loan cost. Longer terms lower your monthly repayments but up the total cost. You might want to go for the shortest monthly repayment your firm can afford to lessen the overall interest.
What common business expenses can I cover with financing?
Getting the word out about your firm and keeping up with technology are essential to consulting firms, but hiring and keeping talented team members is often the top expense. Let’s take a look at some costs you can cover with a business loan.
- Marketing. It’s difficult to bring in new clients if nobody knows about you — word of mouth only goes so far. Taking out a term loan to pay for a one-time marketing campaign or a line of credit to cover multiple projects can pay for itself.
- Hiring staff and payroll. Expert consultants expect to be paid well and your company needs to foot those costs if it wants to bring on the best. A term loan can help you cover the upfront costs of adding a new member to the group, and invoice financing, factoring or a line of credit can help make sure everyone gets paid on time.
- Technology. Regardless of your area of expertise, you’re going to need technology to do your job well. An equipment loan can help you with the hardware and a term loan can cover software costs.
- Working capital. Typically consulting contracts come with a 30- or 60-day payment clause, meaning you might not have the funds to fuel your projects right away. On top of this, the first three months of the year are slow for most businesses. Lines of credit, invoice factoring and invoice financing can help you keep the lights on when things get slow or backed up.
- Remodeling. Your office is part of your company’s brand. Remodeling alone can help seal the deal when you bring new clients in.
- Moving or expanding. Few consulting firms have the money upfront to move to a ritzy ZIP code. Commercial real estate loans can help your business afford a move — and hopefully attract bigger clients.
What will I need to apply?
While it depends on what type of financing your consulting company needs, most lenders ask for the following documents and information.
- Bank statements. Almost all lenders ask to see your business’s most recent bank statements to get an idea of its cashflow today.
- Tax returns. Some lenders only care about your business’s tax returns while others might want to see yours as well.
- A business plan. Banks usually ask to see a business plan — or at least the financial projections section — and some online lenders want to see it as well.
- Your company’s unpaid invoices. This generally only applies to invoice financing or factoring, but you might want to provide these with other types of financing to show that you’ll have funds coming in soon.
- Your credit score. Some lenders look at your business’s credit score, but most care more about the business owner’s score.
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What challenges might I face getting a professional business loan?
Since consulting firms tend to be high-revenue and low-cost, your business might not face as many challenges as others. Younger firms and individual consultants might run into a few roadblocks, however. You could have trouble qualifying for a term loan or line of credit if you’re still building up your client base and don’t have enough regular revenue. Instead, you might want to look into options that don’t rely on a steady monthly income like invoice factoring, financing or a business cash advance.
Another roadblock might also be age. Lenders generally like to work with businesses that are firmly established — young companies tend to fold at a higher rate. You might not be able to get the best deals if your firm is just a year or two old. Anything younger than that can have real trouble finding a competitive loan and might want to consider venture capitalists, selling equity to angel investors or even crowdfunding.
5 industry tips to running a successful consulting firm
- Stay the expert. The business marketplace is always evolving and companies are hiring your firm to give expert advice on how to navigate it today. You need to stay on top of trends, regulations and technology. You also might want to set aside funds to give you and your employees regular training on new topics.
- Become a master at time management. One key to a successful consulting company is taking on as much work as your employees can comfortably manage. To do this, you need to know how much time your employees take on different types of projects and emphasize time management as much as possible.
- Don’t be afraid to say no. Take on too many projects and you’ll underdeliver. Saying no can not only build your reputation, it also gives your firm an air of exclusivity that might bring those clients back.
- Recognize ruts. It’s tempting to stick to tried-and-true techniques, but your company’s job is to be creative and innovative. While some old-school tricks have been around so long for a reason, you’ll lose your freshness if you stick to only what you know.
- Plant seeds. Know your ideal client and make yourself known to them by getting involved in the community. Engage in online conversations, make sure your website and social media speaks to their needs and go to networking events whenever possible.
Bottom line
Running a successful consulting business takes money that your business might not have upfront when you rely on invoices. Growing your firm can cost even more. Business financing can help cover both of these costs — though it isn’t free. To learn more about how business loans work and to get started on your search for a lender, visit our guide to business loans.
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