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Top Ten Best Ways to Get Funding for Your Consulting Practice

The question I’m asked most often is, “How do I get funding for my consulting practice?” Good question. Underlying this appeal for guidance is a genuine recognition of risk—as in, “I can’t risk my savings, house, children’s tuition, etc., so where do I get another source to fund my practice?” Estimating startup cash is your first step in managing that risk. Underestimating startup cash will lead to problems that your practice may not survive. Likewise, overestimating startup cash and overextending yourself on funding can be disastrous. So, I’m always concerned when the person asking about funding can’t tell me what they will do with the money. BTW, also knowing what you will do with your time is critical to a successful startup, but that’s another blog post. Let’s start with the money question, formulate an answer, and then look at where you need to the funds:

Where will I use startup cash? 

  1. Tools. In consulting, service-based businesses, our primary tools usually consist of software and web-based services. For example, Freshbooks or Quickbooks track where we spend money. CRMs track clients and prospects. A calendar tracks our appointments and helps us manage time. Also, don’t forget your phone and email services.
  2. People. Rarely can we go it alone. Focus on your expertise, then outsource the rest to people who can do the work better than you. If you’re not a social marketing guru, hire someone who is. If you’re not a website development guru, hire them, too. If you’re not an accountant, find someone. If you’re not a lawyer, ditto. In full disclosure and self-promotion, if you need a mentor to guide you in your practice (what I do), hire that person, too. These experts usually work and bill per project or product or “deliverable.”
  3. Marketing. No one yet has proved to me that “x” will sell itself. Even something as essential to life as water is marketed at the cost of tens of millions of dollars annually. For consultants just starting out, no one knows who we are and what we offer unless we market ourselves. That’s the only way others will begin to think we’re essential to the life of their business. Consider social media, Google ads and content marketing, conferences and expos, and if you’ve hired a marketing guru, task them with creating a custom marketing plan and budget. Also, factor in the length of time it takes for marketing to generate returns—a minimum of six months is a standard rule of thumb.
  4. Build your systems—an investment of time = money. A business is a collection of systems producing a service or product that creates value for someone else at a profit to you. Your tools, marketing, and the people putting it all together for you are your “system,” meaning that you decide what tools to purchase, whom to hire, and for which tasks and functions each is responsible. Everything starts with marketing which is most likely how you found Opterre. Then, that leads to my collateral (such as my roadmap infographic), and my email service provider (a tool). This suite helps you get to know Opterre and me a bit better; which leads to a pre-sales meeting (hosted by my scheduling tool); which leads to my sales page (hosted by another tool), which connects to my accounting software (yep, another tool), which confirms our coaching/training sessions (again, hosted by a tool). It took time to research all the tools and figure out how they would work together. I generated no revenue while building these systems, but I still needed to pay for groceries. So, factor in how long this will take you and how you will cover everyday living expenses in the meantime.
  5. What else?  Every business is different, so I can’t address all potential startup costs in the space of this blog post. If you’re not sure where to start, we’ve put together are start-up worksheet with an example filled in.  You can find it at Opterre Worksheet for Startup Costs v2.

Also, recognize that not all these costs need to be or should be incurred on Day #1. There is a business cost strategy known as “just in time.” The basic idea is that you shouldn’t pull from your savings and investments or borrow funds until you need the money. There is no reason to lose earnings or pay interest on money you don’t need yet. How you plan to grow your practice will determine when to incur the costs for tools, people, and marketing. As you work through each of the categories above, determine if the costs are ongoing or one-time only, if they are “must haves” or “like to have”—i.e., optional and if the cost is fixed or variable. Then categorize them appropriately in whatever tool you’re using to estimate your costs and when you will need funds to cover them. The “when” is important because it will take time if you need to establish a line of credit or apply for a loan.

Whether you’re sure you will need funding or you’re capable of funding your startup yourself, getting a handle on your costs is an essential step to managing the financial risk of a yet-to-be-proven venture. The exercise itself will reveal areas requiring more thought and analysis and don’t hesitate to seek the advice of an accountant or attorney specializing in small businesses. Also, a business plan goes hand-in-hand with estimating your startup costs and is usually necessary for applying for funding. I’m not going to cover writing a business plan here but get it on your radar now and either join my program or go to the Small Business Administration’s website to access their Business Plan tool.

OK, I have a handle on my startup costs. Now, where can I get funding?

This top 10 list describes some startup funding strategies. For full disclosure, I’m not a financial advisor.  You should seek one out as you build-out your business idea. Your conversation should include a discussion on your financial situation, your business model and plan, the amount of money needed, and your level of risk acceptance/avoidance.  But the following are the most common options.  One or a combination of the following may help your business get started:

  1. Your Savings:
    • Personal Savings: You’ve probably heard the rule of thumb that everyone should have savings equal to at least six months’ worth of living expenses. That’s a minimum, so even having more than six months saved doesn’t mean you should think of the excess as a source of funds. However, if you’ve been saving with a goal of that money funding your perfect career, then this is the place to start. Like any of these options, careful planning is critical. You need to know how much money you need, what you will use it for, and a timetable for spending it. Without this pre-planning, your savings will go quick and you may run out before you have a viable business.
    • Your Retirement Savings (401(k) or IRA): Unless your overall financial plan includes investing your retirement accounts in your business, think long and hard about this one before moving forward. Many financial experts agree that while your retirement accounts may not be the worst place to get money for your business, it is not usually the best place. If you’re under age 59-1/2, using tax-deferred retirement funds without paying income taxes and tax penalties requires much hoop jumping. Therefore, don’t do this alone! Seek professional advice from a tax expert with experience in tax-qualified retirement plans.
  2. Secured Funding: Bank loans and credit card lines of credit are common methods of secured funding. You will need an excellent credit score (greater than 650), and collateral—such as your home—to qualify. Secured funding offers lower interest rates than unsecured funding because you take on more of the risk. If you default on the loan, the lender takes your collateral. In the case of a recession, you don’t want to put your home at risk if your practice experiences a downturn.
  3. Unsecured Funding: This type of funding depends mainly on having an excellent credit score. Because you don’t guarantee the loan with collateral, there’s more risk to the lender—resulting in substantially higher interest rates than with a secured loan. The most common type of unsecured funding is through credit cards. Some financial institutions will also provide unsecured business funding via a cash advance, in which case usually you will need to meet various qualifying requirements such as being in business for a given period of time with a minimum monthly revenue.  Several payment processing solution companies offer small business loans to businesses that have an account with them. After all, if you’re using one of these companies to collect fees from your clients, they have a pretty good idea of your sales. Conveniently, you may repay your loan automatically through your sales—it’s all connected through the payment processing solution app. Two major players in this category are PayPal Working Capital and Square Capital.
  4. Friends, Family, and Crowdfunding: If you know a group of people with a vested interest in the success of your practice, then this funding option may be a good. Friends and family often provide funds for startups. The funds may be gifts or loans. One benefit is that these people know you and probably won’t ask for your credit score. However, if the money is a loan, practice good business fiscal responsibility and use a legally binding promissory note. Crowdfunding (or what I call “others”) includes people who don’t know you—but believe in what you’re doing and wish to support it. When seeking funds from friends, family, and others, you owe it to these people to have a business plan, an idea of how much you need and for what, and any other information you would want from a business asking for your help. Crowdfunding platforms: There are organizations such as Indiegogo and Kickstarter that offer a platform to reach more people, but usually the businesses that benefit from those sites provide creative products rather than services. An exception is Kiva U.S., a non-profit crowdfunded lender, which offers 0% interest loans of up to $10k. Their crowdfunding platform requires you to begin with your friends and family before making a pitch to “others.” As a neutral third party, Kiva may be a great option if you want to maintain cordial relations with family and friends while garnering their financial support.
  5. Small Business Association (SBA) guaranteed loans: The SBA partners with lenders to provide flexible terms and low-interest rates. These loans (called “7(a) loans”) offer some significant benefits such as ongoing business counseling to increase your odds of being successful. However, the criteria for loan approval is stringent, and all SBA guaranteed loans require your personal guarantee, along with anyone else in your business who has a 20% ownership stake. The personal assets of all the 20% owners are at risk if you can’t repay the loan. The odds of obtaining SBA funding, however, are less than 2%.
  6. Peer-to-Peer (P2P) Lending: A relatively new way of debt financing that bypasses banks and other commercial lenders by connecting borrowers with investors. Depending on the lender, a P2P may offer consumer loans or business loans, or both and the loans may be secured or unsecured.
    1. Upstart: 90% of Upstart borrowers are college graduates and small business startups.
    2. Lendingclub: Requires 12 months in business, $50k in annual sales, and fair or better personal credit score.
    3. Prosper: Offers personal loans for small business that do not depend on the length of time you’ve been in business.
  7. Microloans from Nonprofit Lenders: Obtaining a commercial business loan when you’re just starting out is tough because commercial lenders need to make a profit and startups are risky for them. However, nonprofit lenders are not concerned with making a profit but instead have a mission to help minorities, disadvantaged communities, or someone with a great idea get a boost. Some of these nonprofit lenders operate internationally; others service a select geographic area. Their loan terms are substantially more favorable than commercial lenders, and typically they aren’t looking for a proven track record of earnings yet. Here are a few worth looking into:
    1. LiftFund: Alabama, Arkansas, Kentucky, Louisiana, Mississippi, Missouri, Tennessee and Texas businesses.
    2. Accion: U.S. and Puerto Rico businesses. Start-up loans require an outside source of income, and you may need a business plan with a 12-month cash flow projection.
    3. Valley Economic Development Corp: California and New York businesses regardless of the length of time in business. Seeks to lend to minority-owned businesses or those in low-to-moderate income communities.
    4. Excelsior Growth Fund: New Jersey, New York, and Pennsylvania businesses.
    5. Some of the lenders above are CDFI lenders or Community Development Financial Institutions Fund members. The U.S. Department of the Treasury awards money to these lenders who loan it out to drive community revitalization. This website provides a CDFI lender locator.
  8. Venture Capital: Venture capital funds look for private equity (ownership) investments that will generate positive returns for their investors. VC funds may be seed capital for the beginning stages of a startup, or for growth and expansion if the business is more mature. To attract the attention of a venture capital fund, a startup’s leadership must have a successful track record, and the influx of needed cash must be in the several millions of dollars to actualize a proven business model with high growth potential. Fewer than .05% of new businesses will receive venture capital. Those that do took years to create their network and pitched to many, many venture capitalists before obtaining the needed investment.
  9. Angel Investors: An angel investor is a high-net-worth individual or group of individuals willing to infuse millions of dollars into a qualified startup for a share of ownership. Someone you know personally, who is well off, may be willing to fund your business for an equity position (see Crowdfunding above). If you don’t know anyone, networking is key to finding an angel investor interested in your vision and area of expertise. Online platforms such as AngelList and Gust connect entrepreneurs with local investors.
  10. Barter Your Expertise: Trading your skills for something you need won’t cover all your startup costs but can reduce the need for actual cash. In this scenario, you trade your skills for the help of someone else. For example, if your consultancy provides website design and support, you may be able to barter that expertise for blog writing or accounting services from businesses that need an upgrade to their online presence.

Now What?

The good news is the small business funding universe is diverse and continues to grow and evolve—offering you a better chance at finding an option that meets your needs. The most common options are using your own savings, tapping family and friends, and using credit cards or other unsecured funding. None of these, however, is without risk. You could burn through your savings and put your financial security at risk. You could alienate friends and family if you fail to handle their money professionally. Unsecured loans impose high-interest rates because their experience with business failure is also high.

This doesn’t have to be you. Minimize your funding needs by using cash only when you need it—just-in-time. Test out your business idea through Google research and social listening before committing to building all your systems. Plan all your startup spending by knowing what you’re going to use the money for and when you’re going to use it. If you’re unsure how to go about researching, testing, and spending as-you-go, contact us here. We’ll guide you through building your plan, establishing your timing, and determining the amount of funding you’ll need.  Then we’ll work with you and your financial advisor.