How To Finance a Consulting Firm

Consulting companies tend to have high payroll expenses. Obviously, experts in fields common to consulting, such as software, marketing, finance, operations, and technology, command high salaries. And paying your employees on time is critical if you want to remain in the business.

However, most consulting companies are launched with very little capital and have few assets. More importantly, they usually do not have substantial cash reserves. They operate on a month-to-month basis, using incoming revenues to cover expenses. This approach can create a problem if your company is growing and you are taking on new clients and projects.

Corporate clients require payment terms

Most large corporate clients often negotiate payment terms into their consulting agreements. Basically, they want the option to pay invoices in net-30 to net-60 days. They negotiate these terms for two reasons. One is simply bureaucratic. Large companies are procedure-driven and require multiple signatures before approving a payment. Getting those signatures takes time.

More importantly, perhaps, is that paying you slowly is good for their cash flow. They get to use your services and expertise for a month or two before having to pay you. It’s a good deal deal for them. But it can be a bad deal for small companies that can’t afford to wait.

Can you ask for quick payments?

One simple way to accelerate your accounts receivable is to ask clients for faster payment. This strategy can work well if your clients are open to it. Bear in mind that many clients ask for a discount in exchange for quick payment. In Canada, it’s common to request a 2% discount if the payment is made in 10 days or less.

However, asking for quick payments has some drawbacks. One such drawback is your client’s perception of your company. They may perceive you as being in a weak financial position, which could jeopardize future contracts.

Finance your receivables

A better solution to this cash flow problem is to factor your invoices. This strategy provides you with immediate cash flow for your slow-paying invoices. However, your clients still pay on their usual terms and are not required to pay any sooner. A factoring solution can provide substantial improvement to your working capital while minimizing the impact to your clients.

The factoring transaction works by financing your invoices through a factor. The transaction often happens in two instalments. The first instalment covers about 80% of the gross value of your invoice and is funded as soon as you complete the work and your client approves it. The second payment covers the remaining 20% and is provided after your client pays the invoice in full. The factoring fee is often discounted from the second instalment and ranges from 1.5% to 3.5% per 30 days.

Can my consulting company qualify?

To qualify for invoice factoring, your consulting company should meet the following criteria:

  • Your commercial clients must be creditworthy
  • Invoices must be clear of encumbrances
  • Profit margins must be healthy

Pre-billing transactions can’t be funded

Some consulting companies pre-bill for their work. For example, work to be performed during January is invoiced on January 1st and is often paid during the month. Unfortunately, invoices
cannot be factored prior to delivery. Your services must be delivered to and accepted by the client before the invoice can be funded.

Get more information

We are a leading factoring company and can provide competitive terms to Canadian consulting firms. For information, get an online factoring quote or call us at (877) 300 3258.