Invoice Factoring For Consulting Companies

A consulting company’s payroll expense can be larger – and more important – than all of its other expenses (e.g., rent, telephone, and equipment) combined.

However, meeting payroll can be a challenge for consulting company owners because most consulting companies (such as technology consulting firms) are started by knowledgeable, highly skilled individuals who don’t always have a substantial amount of money. Since the companies are not well capitalized, they can often overextend themselves because clients demand credit terms to pay invoices in 30 days.

Credit terms and 30-day payments

Most corporate consulting contracts have a 30-day payment clause. Large companies like to pay invoices in 30 to 60 days for a couple of reasons. One is bureaucratic. In large companies, invoices often have to be approved by multiple people, and the approval process takes time. But there is a more important reason why they pay slowly: it improves their cash flow. Your corporate clients get to use your services for 30 days before paying for them. These terms are similar to giving them an interest-free loan.

Slow invoice payments hurt small consulting companies without the resources to wait for payment. This practice can prevent them from adding staff for new projects, simply because they can’t afford to hire new consultants, or it can prevent them from paying current employees, which could threaten the business.

Build a cash reserve

A simple way to avoid this problem is to build a cash reserve for your company. Ideally, you should have enough money to cover expenses – including payroll – for a few months. You can use this reserve to cover expenses when clients pay slowly or to increase staffing if a project demands it.

Having a reserve fund gives you great flexibility. However, building a substantial cash reserve is difficult and can take a long time.

A better alternative may be to complement your existing reserves with an invoice factoring line.

What is invoice factoring?

Invoice factoring is a solution that can help consulting companies with cash flow problems due to slow-paying customers. Invoice factoring works by partnering your company with a factoring company, who finances your invoices from creditworthy clients, giving you immediate access to funds and the liquidity you need to pay expenses. The transaction concludes once your client pays the invoice in full.

Basically, the factor buys your invoice in two installments. The first installment can pay up to 90% of the gross value of the invoice and is wired to your account when you complete the project or project segment. The second installment is wired, less the financing fee, when your client pays the invoice in full. To learn more, read “How does factoring work?”

How does invoice factoring help your consulting company?

Invoice factoring can help your consulting company in a number of ways. The obvious benefit is a reduction in the time it takes you to get paid. Whereas clients can make you wait up to 60 days to get paid, factoring companies can pay you in a day or so – improving your working capital and smoothing the operation of your consultancy.

A greater advantage is that the line is flexible and can grow quickly. If you get a large project but can’t afford to hire additional consultants due to slow payments, you can factor your invoices and make payroll. This approach, however, requires careful planning and consultation with your factoring professional and your financial advisor.

Can my consulting company qualify?

Invoice factoring is available to most consulting companies that work with commercially creditworthy corporate or industrial clients. Additionally, your company must:

  • Invoice after services have been delivered
  • Have good billing practices
  • Not have serious legal/tax problems
  • Not have receivables encumbered by liens

Will it help me?

Factoring invoices helps your company if your main problem is that your clients pay their invoices in 60 days but you need money sooner. In this case, invoice factoring should help improve your cash flow.

Get more information

We are a leading factoring company and can provide high advances at low rates. For information, get an online quote or call (877) 300 3258.