As part of the significant shift toward a self-employed workforce across the country, many former full-time employees are taking their expertise and striking out on their own. If you’re among the entrepreneurial types building out a consultancy, you may be interested in finding out how to get a business loan for a consulting business.
A business loan can be a great idea for many consultancy owners. Even if you’re savvy about watching your expenditures, you might still come to a point at which you need more capital to help grow your business, or optimize your cash flow.
We’ll discuss why pursuing business loans for consulting businesses can sometimes be unique, your best options for loans, and what you need to do to apply.
Before You Apply for Business Consulting Loans, Understand Your Financial Position
Consulting businesses can be uniquely rewarding and fulfilling: You get to use your strategic chops and fuse them with your entrepreneurial spirit. And, when built with the right resources, consulting businesses can also be lucrative endeavors.
Let’s turn the table for a second, however, and look at your business how a lender does. Lenders also do see the upside with consulting businesses—but they’re most interested in looking at the hard financial facts of your company. This includes your cash position, the risk of your industry, your monthly recurring revenue, time in business, and more.
Before you can apply for a consulting business loan, you’ll need to understand your own financial position. For instance, what are you spending on now, and what do you need a capital infusion for going forward? How consistent are your revenues from month to month?
Let’s break down some scenarios you might be facing, or ones your business could encounter. Understanding how they relate to your own company can not only help you determine your eligibility, but also help you identify how certain types of loan products can help you address them.
Common Financial Situations for Business Consultants
There’s something in the “thrill of the chase” that many consultants like—that is, the quest for new clients, accounts, and projects. One potentially unfortunate side effect of this setup is that consultancies may sometimes find themselves with fluctuating revenues.
- Recurring revenue: Before you apply for a business loan, you’ll need to understand your recurring revenues (also called MRR). This impacts your cash flow, which is a significant consideration for business lenders, since they want to be sure that you have enough consistent income to be able to repay a loan.
- Seasonality: Similarly, you’ll want to be certain that you understand if your business has a component of seasonality. Not only does this affect your cash flow, as you likely know, but you’ll have some extra considerations to take into account when applying for a business loan for a seasonal business. (That link will tell you what you need to know!)
- Unpaid invoices: Finally, another common situation for consultancy businesses is unpaid invoices. Unfortunately, when you work with multiple clients on different payment terms, sometimes you find yourself having to chase invoice payments (though we likely don’t have to tell you that!). This can have a major impact not only on your cash flow margins, but, when things get dire, also prevent you from being able to pay your bills or employees.
Common Expenditures for Business Consultants
Along with some tricky financial situations that can affect your cash flow, you may find that you’re spending a lot on specific categories—and may need help to pay these expenses. Even among different types of consulting services, consultancies often spend on some of the same major categories, so let’s examine how they may fit into your current financial situation as well as your quest for capital.
- Payroll: As we touched on, payroll is obviously one of the most important expenditures you have—and need to spend on. With poor cash flow, you could come up short in the payroll department. And, with consultancies, the strength of your employees is equivalent to the strength of your service, and the core of your competitive advantage.
- Travel: And, speaking of your employees, they may have to travel to be onsite with clients. Even if you’re savvy about using the right business travel credit cards, you still have to pay off those bills, of course. You may need a resource to tap into regularly so you’re not up against a wall paying high credit card APR.
- Marketing: The business consultancy market is competitive, that’s for sure. If you’re not spending on marketing, you should be—it can be a major engine of growth for you, and a way to outshine the competition.
- Supplies: Although you likely don’t have the same kind of “equipment” that a manufacturing business might, you likely do incur expenses to keep things running. For instance, you almost certainly need computers, but also need to pay for phones and maybe even hotspots when your consultants are traveling. Of course, all of these things add up.
Business Lenders Look for Strong Candidates
Of course, this isn’t something you don’t know—lenders want to provide capital to the most qualified candidates. But knowing how they evaluate them is important, and worth mentioning now that you’re taking a good, hard look at your own financial position.
The most important thing to understand about business lenders is that they’re a business just like you—and their business is to not only get repayment on loans, but make money through interest. The only way they’re able to mitigate the risk of a borrower defaulting on a loan is by using criteria to help them evaluate credible candidates.
As you’re reviewing your own financials, make sure you’re very familiar with the following pieces of your financial profile:
- Your credit score
- Your business bank account balance now, and throughout the last four months
- Your fixed costs versus variable costs
- Your outstanding debts
- Your assets in both cash and other manifestations
How to Get a Business Loan for Your Consulting Business
Now, let’s get into the nitty-gritty of how to get a business loan for your consulting business. In essence, it’s a pretty simple process that you can break down into just a few steps. And, if you’re diligent about understanding your financials and preparing what you need in advance of applying, then you’ll hopefully find the process pretty easy.
Step 1: Select your type of financing.
The first thing you need to do is figure out which type of financing is best for you. To do that, you’ll want to decide on the form that you’d like your cash infusion to take: a traditional loan, so to speak, that’s a lump sum deposited into your business bank account after approval; a line of credit product, which you can draw against the way you would a business credit card; or asset-based financing that directly purchases your debt.
Let’s go through a few examples of each:
Best for business expansion, real estate purchases.
A term loan is that “traditional” business loan. You work with a lender to get approval for a certain amount of financing based on your creditworthiness and financial standing, and receive a lump-sum deposit into your business bank account. The upside of term loans is that you’re able to access all of the capital that you need at once; the downside is that you have to pay interest on all of it.
Term loans take a few different forms that you should know about: medium- and short-term loans, which have repayment terms of about five years and one year, respectively; and SBA loans, which are considered the best-of-the-best in terms of business loans, and have preferred interest rates and repayment periods up to 25 years. (As you might expect, these go to the absolute most qualified candidates with strong credit scores and excellent financial histories.)
Business Line of Credit
Best for piecemeal expenses, emergencies, cash flow gaps.
One of the most versatile business loans for consulting businesses—or any business at all—is a business line of credit. This kind of financing is a kind of hybrid between a term loan and a credit card cash advance. You get approved by a business lender based on your financial profile, and then are given access to a line of credit that you can draw against any time, and are given a period by which to pay it back. One big advantage of business lines of credit is that you only have to pay interest on the amount that you draw.
Many companies have a business credit waiting in the wings for any cash flow emergencies they may have, or to be able to take advantage of an opportunity that they might not generally have the capital on hand for. In addition, some business lenders will allow you to have a business line of credit at the same time as another type of business loan (which isn’t generally the case with, for instance, multiple term loans; this is called “loan stacking”).
Best for cash flow gaps due to unpaid or upcoming invoices.
Invoice financing is a tool that many savvy business owners use strategically. With this type of business loan, a lender will finance up to 85% of your outstanding invoice, and when you receive payment, they’ll give you the remainder minus their fee.
This isn’t just for unpaid invoices, however. You can use invoice financing on any type of invoice for which you need the cash faster than it comes due. Sometimes, when consultancies work with larger institutions, they pay vendors or longer trade credit terms, such as net 90—which means your invoice may not get paid for upward of four months due to weekends and holidays.
It’s also worth noting that equipment financing works in a relatively similar way in the sense that it’s tied to an asset or debt. With equipment financing, a lender enables you to purchase equipment (such as computers) with their loan, and then uses the asset itself as collateral. It’s a good alternative for those looking to specifically purchase gear, without needing to get a term loan or line of credit.
Step 2: Gather your documentation.
Once you figure out which loan you’ll be applying for, you’ll need to gather the requisite documentation for a lender to evaluate your application. This varies from loan to loan (for example, SBA loans require significant documentation).
You should look specifically at the type of business loan you’re applying for to make sure you have everything (your lender or specialist will help you, too). There are a few things you can likely grab in advance, however:
- Your last three to four months of bank statements
- Your profit & loss and balance sheets
- Any cash flow statements you have
- Information on your business, including incorporation documents and operating licenses
- Quotes for anything you plan on financing directly
Step 3: Submit your application.
Now, you’re on to submitting your application!
Each lender has a slightly different process, which includes that documentation we just talked about and timelines for approval. (The type of loan product you apply for also has bearing on your time to a decision.) It’s important to know that if a lender comes back to you and asks for more or different documentation, don’t be alarmed—it’s a standard process so they can get a full picture of your financial profile.
Hopefully, you’ll get approved for the financing product you want. If not, you may be able to speak with your representative to find out if there’s a better financing product available for you, and what you need to do to improve your odds of approval for another time.
Getting Loans for a Consulting Business
Maybe you’re surprised that there aren’t a ton of steps for how to get a business loan for a consulting business—but that’s good news, we hope! As long as you understand your financial position, figure out what kind of loan you want and how quickly you want it, and submit your application in an organized way, you’ll have the best shot possible to get approved. Good luck!