Loans and Financing for Business Consulting Companies

Loans and Financing for Business Consulting Companies

Loans and Financing for Business Consulting Companies

Business owners looking for a small business loan for their consulting business are in luck, there are a lot of options, including an SBA loan, business cash advance, a line of credit, or other term loan. Interest rates and terms will vary depending on the creditworthiness of the borrower, so to get the best loan rates and terms you’ll need a good to excellent personal credit score, several years in business, and annual revenues of $250,000 or more.

Consulting company loans come in a lot of different shapes and sizes, which means there are options even if you have a younger business or don’t meet some of those other criteria, but you should expect to pay a higher interest rate, be offered a smaller loan amount, and could have shorter terms.

Overview of Financing for Consulting Businesses

Before you start looking for business financing, you’ll need to evaluate your business and financial position to make sure you’re looking in the right place and that you get the financing that is best suited for you and your consulting business. The application process will vary from lender to lender, but there are a few things you will likely need to complete your loan application:

  • Your annual revenues
  • Your monthly cash flow
  • 3-6 six months of bank statements to apply (depending on the lender)
  • Time in business
  • Business and personal credit history

In addition to the above, most traditional lenders (like banks and credit unions) as well as the SBA will likely want to see a detailed business plan, collateral (like real estate), and several years in business before they’ll approve a loan.

Although they probably won’t ask it this way, lenders want to know the answers to these three questions,

  1. Can you repay a loan? Which is why your revenue and cash flow numbers are so important. They are looking for evidence that your consulting business has the financial ability to make periodic payments.
  2. Will you repay a loan? This is a little different question, but is why they look at your personal and business credit history. Fortunately, different lenders have different thresholds for what they will accept, so even if you have a less-than-perfect credit history there are still options for you.
  3. Will you make all your periodic payments throughout the term of the loan? Although there are many lenders that don’t require several years in business to approve your loan application, they are all trying to evaluate what you will do with the payments associated with this financing, based upon what you’ve done in the past.

If a lender requests electronic access to your business bank account, it’s a good idea. It makes it possible for the lender to confirm you have the revenue and cash flow to support periodic payments and it streamlines the process for you and your business. By the way, there are many lenders that won’t even consider your loan application if you don’t have a business bank account.

Types of Financing Options for Consulting Businesses

There are a number of different consulting company loans available to firms looking for working capital or to augment short-term cash flow needs. Depending on the financial situation of your business, there are a number of options to consider.

  • SBA Loans: Although the SBA (Small Business Administration) isn’t a lender, they do guarantee loans with member banks and credit unions offering some of the lowest interest rates and best loan terms available. To qualify, you’ll need “acceptable” credit—in other words, reasonably good credit in the mid-600s. You’ll also likely need some collateral if you’re looking for a loan over $25,000, but they will sometimes loan to younger businesses.
  • Traditional Financing: If you have good to excellent personal credit and your business credit profile is good, you can apply for a loan or line of credit for your consultancy at a bank or credit union. Interest rates will likely be lower than other types of financing and will usually offer longer terms (meaning lower periodic payments). They usually want to see several years in business with strong revenues. They may also require some form of collateral in addition to your personal guarantee.
  • Online Loans: Online lenders will often work with borrowers that traditional lenders won’t, but lower interest rates and longer terms are typically only offered to borrowers with the strongest credit history, a few years in business, and revenue that demonstrates the ability to make periodic payments. Some online small business loans offer very competitive interest rates to highly-qualified borrowers that rival traditional financing.
  • Business Lines of Credit: This type of business financing offers a tremendous amount of flexibility to a business consultant allowing the business to use the credit available to them (within the credit limit), repay the credit line, and use it again. Your consultancy will only pay interest on the amount of credit you use and will have extra capital available when you need it. Interest rates on a line of credit are typically a little higher than a conventional loan, but will vary depending on the creditworthiness of your consulting business.
  • Equipment Financing: This can be a good option for younger consultancies because the equipment being purchased can be used for collateral, provided you have a good, or better, personal credit history. If you’re thinking, “I don’t have heavy equipment, why would equipment financing work for my business,” your computers, office equipment, and office furniture also qualify as equipment. This can be a good option because it will enable you to free up cash flow for those things that require cash.
  • AR Financing: Not to be confused with Invoice Factoring (which is another type of AR Financing available to you), AR Financing leverages your Accounts Receivable as collateral for small business financing and can be a good way to obtain extra capital if you have a lot of customers who pay via invoice.
  • Business Cash Advance: Business cash advance is financing based upon your business’ cash flow. The credit requirements are less strict than some of the longer-term financing options mentioned above and interest rates will be higher (possibly much higher depending on your credit history). With that said, this type of financing can be a good way to capture additional ROI on a particular project because you can often get an answer on your loan application within hours opposed to days or even weeks. The periodic payments will likely be either weekly or daily as opposed to monthly, but if you need fast access to additional capital and don’t have a business line of credit, this is an option you should consider.
  • Business Credit Cards: Business credit cards offer much of the flexibility of a business line of credit, but don’t typically offer the same credit limits. Nevertheless, a business credit card can be a fast and convenient way for many small business consultants to access borrowed capital for a variety of purposes. What’s more, because approvals are often based on the business owner’s personal credit score, if you have a good or better score, a business credit card will be much easier to qualify for than other types of financing.

How to choose the best type of financing for your consulting business

The best type of consulting company loan for your business will depend on several factors.

  • Your personal credit score
  • Your business credit profile
  • Your time in business
  • Your annual revenue
  • Your monthly cash flow
  • Whether or not you have collateralizable assets

Having a great credit history doesn’t necessarily mean you’ll be able to choose the type of financing you want, but it will provide you with several options that could be a good choice for your specific use case. Choosing the best loan options for your business will require you to ask yourself some additional questions:

  • What is my loan purpose? Why am I borrowing? This will help you determine how much capital you need and how quickly you will need it. It will also help you determine how much you can afford in terms of interest rate and total dollar cost of the financing.
  • How much do I need to borrow? Regardless of where you borrow, there are costs associated with financing, so borrowing more than you really need is not only expensive, it can hurt your business. What’s more, some lenders are better at different size loans than others. In other words, some lenders (like online lenders) work with smaller loan amounts every day while others (like banks) prefer larger loans—so borrowing $25,000 would be a very different experience than borrowing $500,000 depending on the lender you choose.
  • What does my credit profile look like? Honestly evaluate your credit situation before you start applying for financing. Wasting time applying with lenders where the possibility of approval is slim can be incredibly frustrating. Focus your search on those places where you are likely to have the best measure of success and look for the best option there.

Don’t be discouraged if you get turned down by the local bank, there are other options available to you. Options that might even help you improve your credit situation so you can be a better borrower and demonstrate your ability to successfully service debt.

How to qualify for financing for your consulting business

Qualifying for financing will vary depending on where you apply. Start by evaluating your credit profile, the health of your business consultancy, along with your cash flow and revenue. Pull this information together so you have it at your fingertips when you apply. The more prepared you are before you talk to a lender the smoother the process will go and the faster you’ll be able to get an answer.

How to apply for a loan for your consulting business

If you’re applying at a bank or credit union, expect a multi-page application and several days (if not weeks) for your application to be reviewed. On the other hand, online applications are typically very short and will leverage technology to make the process easier and much faster.

Be upfront with your situation when you apply. Don’t try to paint a rosier picture of your business’ financial situation than actually exists. Lenders will find the truth during the underwriting process and a disingenuous application will result in immediate rejection.

If you’re asking for the right loan amount and chosen the lender most likely to approve your loan based upon your consulting company’s qualifications, you’ll be more likely to get the financing you’re looking for.

This article was originally written on April 12, 2021.

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