A consulting company, on the face of it, doesn’t really need a large startup capital, especially in the beginning when they still have very few employees. It’s only when the work gets underway when learning how to get working capital for a consulting company becomes more crucial. Offices have to be maintained, employees need to be paid (even if you’re just the sole consultant in your firm), and of course the networking and advertising expenses must be covered as well.
Figuring out how to get working capital for a consulting company depends greatly on your contacts. This applies directly when trying to get funding, and also indirectly when you’re trying to get clients.
Here are some of the options you need to consider:
- Bank Loans. This is of course the standard method of getting working capital funding, but of late this may not be the most ideal option. The crux of the matter is that getting this kind of loan is almost impossible because you usually don’t have much in terms of company assets which you can use for collateral. One way of getting a bank loan for your business is if you are willing to use your own home as security.
- Using Credit Cards. This is actually a very popular option. For most solo consulting operations, credit cards have limits which can adequately cover expenses. For best results, you may want to consider getting a separate credit card for your business so that your personal and professional finances don’t get mixed.
This is a viable option if you don’t have an employee such as a permanent secretary to cover. If you do, then this can get very expensive very quickly, as credit card interest rates are usually among the highest in the lending industry.
- Equity Financing. This is when you take in a partner who gives you the working capital you need in exchange for a slice of the company. While this is a good way to get funding for growth purposes, for working capital it can truly dilute your future profits. From a long-term perspective, this is one of the more expensive ways of getting working capital.
- Immediate billing. Some experts in the consulting industry recommend billing clients on day one. They say that the predictability of this payment process may appeal to clients. In addition, you can charge fees plus 15% for expenses and then agree to reconcile against actual expenses in 90 days. This separates your fees from disputes about expenses.
- Invoice factoring. On a more realistic note, it may be more practical to expect clients to want to pay later instead of sooner. Limiting your clientele to just those who can pay upon delivery can severely limit your growth. But then again, that can cause working capital difficulties.
This is where invoice factoring comes in. This method of getting working capital involves getting 80% or so of the invoice amount right away from a factoring company. Then when the client pays in full, the factor forwards you the rest of the pay after they have deducted their fees.
As a consultancy firm, your expenses involve research and meeting payroll for your employees. Certainly marketing and advertising will also have to be taken care of. You can cover all these expenses only if you know where to get working capital for a consulting company.