Last Updated on October 14, 2022
Many consulting firms spend lots of money upfront to hire the best personnel and train them to their standards. Unfortunately, some customers make you wait weeks or even months for payment, leaving you to foot the bill, increasing debt and disrupting cash flow.
To grow your professional consulting firm and compete in the market, you need access to cash to keep up with operating costs and build good relationships with corporate clients, which is where consulting firm factoring comes in. In this article, we discuss how factoring works, its benefits, and how it stacks up against other financing options.
Read on to see how altLINE’s invoice factoring services can improve cash flow and business growth!
What Is Consulting Firm Factoring?
Consulting firm factoring is when your company sells invoices to a third-party company in exchange for a cash advance. Factoring is often used by consulting businesses to improve cash flow to make payroll and pay operating expenses when invoices take a long time to clear. Instead of waiting for clients to pay their invoices to grow your business, you can sell your accounts receivables for a cash advance and focus on growing your company.
Benefits Of Invoice Factoring For Consulting Firms
As a consultant, you must spend money to improve a company’s profitability. However, your clients can be very slow to pay, leaving you in a bad situation when paying bills and expenses.
Consulting invoice factoring can accelerate the payment process, giving you these benefits:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best invoice factoring companies approve applications within 1 or 2 days. Once you submit the invoice, you will receive up to 90% of your money within 1 or 2 days instead of 30, 60, or even 90 days, giving you the flexibility to take on new clients with little notice.
Access Capital To Grow While Maintaining Equity
Many consultants sacrifice equity for cash to fuel growth, but invoice factoring can help them reach long-term success without giving up shares. Consulting firm factoring provides quick cash to pay debts, fund new jobs, make payroll, and grow your company while keeping your equity intact.
Take The Guesswork Out Of Payments
Overdue invoices and delinquent customers may seriously impede your business growth. Factoring invoices gives you the cash needed to mitigate the impact of late payments, keeping your company financially healthy.
Take on New Projects Quickly
If you recently started a consulting firm and are looking to grow, it can be difficult to take on new clients, especially if they are large, without hiring additional consultants. You should not have to rely on the long payment cycles involved with invoicing corporate clients to expand your team and grow your company. Invoice factoring helps you access cash to bring on new talent when you need it so that you don’t have to worry about missing out on the next big opportunity.
How Does Factoring For Consulting Firms Work?
Factoring for consulting firms through altLINE works by turning unpaid invoices into cash to pay operating expenses and payroll, while fueling company growth. Instead of waiting for customer payments, invoice factoring provides cash whenever you need it. Moreover, our invoice factoring services help you focus on growing your business instead of stressing over late payments.
Here is a guide to factoring for consultants with altLINE:
Submit Your Unpaid Invoices
We accept invoices from all customers, though we prioritize invoices from creditworthy customers and large to medium-sized companies. Additionally, we do not factor invoices for customers who frequently make late payments.
If your invoice turnover times are between 30 and 90 days, your receivables are well-positioned for factoring.
altLINE Advances Up To 90% Of The Invoice Face Value
You can generally expect a factoring advance rate of 80-90% of your invoice’s face value and receive the cash advance between 24 and 48 hours after submission into your business account. The exact timing of your cash advance depends on your customers’ receipts and acknowledgment of goods.
altLINE Helps Collect Payment For Your Outstanding Invoices
altLINE provides accounts receivable monitoring and collection support to assist your team. When customers pay, they deposit money to a lockbox under your company’s name, and our team will report each payment to you. If issues arise, we will work with you to communicate with customers to resolve payment disputes professionally, so you can maintain good business relationships.
altLINE Pays Out The Remaining Unpaid Invoice
After collecting factored invoices, we deduct our fees (typically 1-5% of your invoice) and transfer the remaining invoice value to your company.
Uses For Your Cash Advance
Receiving cash advances from consulting firm factoring means you do not have to wait on customer payments to fund your business. Instead, you can avoid lengthy payment cycles and gain growth capital sooner to accelerate business. See what you can use your cash advance for below:
Paying consultants on time is essential to running a successful firm. Late customer payments impede your cash flow, which could result in missed payroll obligations and reduced employee morale. Invoice factoring provides advances on unpaid invoices to ensure you always make payroll on time.
Accept New Jobs
You should not wait for customers to pay to take on new jobs and grow your business. Cash advances from invoice factoring eliminate the payment lag, allowing you to accept more consulting projects while maintaining equity.
Pay Operating Expenses
Operating expenses like transportation, cell service, rent, and business insurance can dent your finances if you do not have good cash flow. Factoring your consulting invoices improves your cash flow, ensuring you can pay for those expenses without sacrificing equity or getting into debt.
Grow Your Team
Bringing additional consultants onboard does not have to be stressful or unattainable. With invoice factoring, you can access the payroll funding you need to expand your team.
Businesses in the Consulting Industry We Fund And Finance
altLINE provides invoice factoring services to all kinds of consulting businesses, including but not limited to:
- Management consulting firms
- Strategy consulting firms
- HR consulting firms
- Financial advisory firms
- Technology consulting firms
- Operations consulting firms
Factoring Your Consulting Firm Invoices vs Other Funding Options
In addition to invoice factoring, you have other financing options to improve cash flow when your clients delay payment. Here, we compare invoice factoring against three common financing alternatives:
Consulting Firm Factoring vs Bank Line Of Credit
Most consulting firms choose a bank line of credit as their first financing solution. However, you may not receive enough funds to grow your company, even if you qualify for a line of credit.
Banks typically look to fixed assets when reviewing a line of credit application. If you are a new or growing consulting business without many fixed assets, you may have a harder time qualifying for a line of credit.
Consulting firm factoring is the better option for new and growing companies because factoring providers look at your clients instead of your assets to approve cash advances. If you work with an established customer base, factoring companies are more likely to give you the working capital that banks cannot.
Consulting Firm Factoring vs ACH/MCA Loans
ACH (automated clearing house) or MCA (merchant cash advance) loans are popular because they are easy to qualify for. Lenders only need to review your bank statements and can approve loans within 1 or 2 business days.
However, ACH or MCA loans are notorious for their high lender fees and interest, which can sometimes reach up to 60% of your original loan value. Moreover, these types of lenders offer lots of renewals that can drown businesses in debt, leaving a lot of folks wondering how they can get out of their MCA/ACH loans.
Professional consulting factoring is typically safer because your cash advances are secured against client invoices that will eventually be paid. As long as your clients make their payments to you, invoice factoring is a less risky option, meaning you can focus on developing your business instead of stressing over debt repayment.
Consulting Firm Factoring vs Quick Pay Discounts
Unlike the other financing options, you can use quick pay discounts to accelerate cash flow without the help of a third party. However, there is a crucial limitation to early payment discounts because the success rate depends on your customers.
Customers may not take your discount offers if they prioritize having more cash on hand, which can leave you low on capital.
Factoring in the consulting industry is typically more reliable because you will receive the cash advance as long as your invoices are approved.
Typical Consulting Firm Factoring Rates And Fees
Factoring companies for consultants charge factoring fees on every invoice submitted, based on how much you factor and how long customers take to pay. Factoring more money and getting customer payments faster generally mean lower rates for you. The factoring company may also review other criteria like your company’s time in business, customer base diversity, and customer credit quality.
Consulting firm factoring companies charge two types of fees:
- Initial fee: This fee covers your invoice factoring for a set initial time period (typically the first 30 days) of the cash advance. Expect to pay 0.90%-3.50% of your invoice’s total value.
- Incremental fees: These periodic fees start after the end of your initial fee period to compensate the factoring company for waiting on repayment. Expect to pay 0.25%-1.50%, and note that the longer an invoice is outstanding, the greater the incremental fees will be.
Requirements To Apply For Consulting Firm Factoring
Before factoring your invoice for consulting services, you must provide some information to qualify. Here are the documents you need:
List Of Existing And Potential Customers
altLINE needs a list of your existing and potential clients as part of your application. We need it to review your customer base’s credit quality and determine your eligibility for factoring.
When applying for factoring with altLINE, you must complete the provided form. You will need to enclose the following documents alongside your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Relevant corporate paperwork
Accounts Receivable Aging Report
Accounts receivable aging reports categorize a company’s outstanding invoices by due dates. altLINE needs this report to research your client base’s payment behavior to determine the eligibility of their invoices for factoring. We will consider factoring invoices 60 to 90 days outstanding, but invoices where customers state they cannot pay may be ineligible for factoring.
Frequently Asked Questions About Our Factoring Services
Do you have more questions about factoring for consulting firms with altLINE? Check out our FAQs below:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all consulting firm owners that apply for factoring. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to identify a consulting factor that is willing to help.
Do you require UCC filings when factoring for independent consulting firms?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is consulting factoring considered debt or a loan?
Consulting factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers. However, altLINE is a recourse factor, so you may need to pay the cash advance back if your client fails to pay their invoice.
Do you offer non-recourse consulting factoring?
altLINE only offers recourse consulting factoring. While you must repay the cash advance if your customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger credit limits on your clientele.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.