If you own or manage a consulting firm, you know that cash flow can be a problem. You incur unusually heavy upfront costs—to hire the best professionals and ensure they receive the ongoing training they need to remain up-to-date. However, the very clients you work so hard to help are sometimes hesitant to pay you on time. In addition, the work you do is irregular—you might have 3 projects one month, but none the next. Small business provider Insureon aptly describes the nature of the problem:
“As a management consultant, you’ve helped all kinds of clients improve their profitability, increase their revenue, and manage their finances — so it’s somewhat ironic that small consulting firms often struggle with their own cash flow problems. With the feast or famine nature of your work, consulting firms have highly irregular income and will need to take precautions to weather lean months and ensure they’re saving enough of their revenue during busy times.”
How Do You Improve Cash Flow?
There are several potential solutions to the cash flow problem many consulting firms face. For example, you could require clients to pay an upfront deposit for each project, or offer monthly payment plans. One of the most effective solutions, however, is invoice factoring.
What Is Invoice Factoring?
Invoice factoring works as an arrangement where you sell your clients’ invoices to a third-party, called a “factor,” who becomes responsible for collecting payments. The factor typically pays you the majority of the invoice immediately. Once clients have paid invoices in full, the factor deducts its fee and sends you the remainder of collected funds to close the account.
What Are the Benefits of Invoice Factoring?
Maintaining a healthy business relationship with key clients is critical to your consulting business—one of the chief benefits of invoice factoring is that you can maintain a healthy relationship with clients, since that relationship is no longer muddied by requests for payment, requests that can sometimes lead clients to search for another consulting firm.
In addition, working with a factor can remove the need for your firm to take on additional debt to maintain a healthy cash flow. This is especially important for firms whose credit limit is already stretched. With invoice factoring, you avoid the need to submit to yet another credit check or open an additional line or credit.
How Do I Find the Best Factoring Company for My Business?
Different factoring companies have various levels of expertise, and serve different kinds of businesses. They also have varying fee structures, contract terms and programs. The goal is to find the factoring company which is best for your consulting firm. Doing so requires considering several factors, including the following three:
1. Which Type of Factoring Company Is Best for Me?
There are 3 basic types of factoring arrangements:
- Recourse factoring – This arrangement is the most common and the least expensive of the options. You, the consulting firm, assume the risk if clients fail to pay the factoring company, so make sure you choose to work with a factoring company who helps with credit services. By finding a partner who provides strong credit analysis of your clients, you will be in a better position to ensure full repayment.
- Non-recourse factoring – In this scenario, the factoring company assumes the risk for non-payment. In other words, if your client fails to pay, you are not responsible to repay the factoring company. Because risk is higher for the factoring company, they tend to charge higher fees.
- Spot factoring – This entails a single invoice payment on a one-time basis.
2. How Much Will it Cost?
It’s important to compare multiple factoring companies before you make your final selection. Read the fine print in your contract, because their fee structures vary greatly. Pay special attention to advance, factoring fees, reserve requirements and whatever additional fees the company charges (such as processing fees). If you find the several proposals you receive confusing, check with a trusted bank partner or financing company to help you make your choice.
3. How Will They Treat My Clients?
The last thing you need is for a third-party to employ the aggressive tactics of some collection agencies—that can defeat the purpose of hiring the factoring company in the first place, since you could lose clients and needed revenues. Make sure the factoring company you choose will provide the same level of customer service you, yourself, provide your valued clients. Before making your final selection, check for customer reviews, and always ask the factoring company for references.
Successfully managing your consulting firm can be complicated, and you can’t expect yourself to be an expert on every subject. From time to time, you’ll need to work with a trusted and experienced partner, whether you need help with invoice factoring, accounts receivable financing, or asset based lending. To learn more about the ways The Southern Bank Company can help you grow your consulting firm and maximize profits, contact us today.