Invoice Factoring for Consulting Firms

Last Updated on August 26, 2021

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.

What’s the Main Cause of The Problem?

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 factoring invoices.

What Is Invoice Factoring?

Invoice factoring is 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 Factoring for Consultants?

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 factoring rates, 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:

Make the Best Decision for Your Consulting Business

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.