Charvi
Do you need start-up financing for your consulting company? These days, you hear the terms “start-up financing” and “start-up funding” very often. Many small businesses have become Fortune 500 companies simply because they have the right financing. For example, Google received $25 million in funding from Sequoia Capital and Kleiner Perkin over two decades ago. And look where Google is today!
However, as a consultant looking to start your firm, you will need help getting money from venture capitalists or private investors. How come? Well, because, unlike the predictable financial returns of a cutting-edge technology company like Apple or an innovative automaker like Tesla, the return on investment of a small consulting firm is very unpredictable. And even if the returns were predictable, only some venture capitalists (used to investing millions) would invest their time and energy in a small consulting firm.
Is there a way for consultants to raise money for their own consulting business? Yes, there are, and that’s what this article is about. Let’s explore the top 3 ways to fund a start-up for a private consulting firm.
Strategy #1: Bootstrapping
As a consultant looking for start-up funding to launch your consulting firm, bootstrapping can be the first step. Bootstrapping means using your funds, including money borrowed from friends and family, to start your own business. Entrepreneurs who choose bootstrapping do not have to rely on bank loans or other complicated start-up financing procedures. You use the money you have to finance your start-up. So, let’s discuss the pros and cons of this method of start-up funding.
Advantages
1. Full ownership
If you use your own money to start your business, you don’t have to worry about being fired from your company. Do you remember what happened to Steve Jobs? Even though he was the face of the company and co-founded Apple, he was summarily fired because he had many business partners and investors. Even if your consulting firm doesn’t become a Fortune 500 company, at least you’ll have complete control of your company for as long as you want.
2. Control over decisions
Most business founders need to be aware of the pressure of external funding. However, you have complete autonomy if other people have not invested their money in your company. So, if you take care of start-up financing yourself, you can control your company without being pressured by outsiders.
3. Agility
Using your money for start-up funding lets you tackle things early and move forward quickly. You no longer have to wait for investors to answer your calls or meet with you in person – you have the money and can start your own company and increase.
Disadvantages
1. Possible financial loss
The biggest downside to bootstrapping is the potential loss of money. Yes, that can happen. However, if you are an experienced consultant, you already have strong business acumen, and it is doubtful that you will make poor business decisions. So have confidence in your abilities and take the step when ready.
2. Problems with growth
Indeed, you cannot compete with top consulting firms if you only use your savings to start your own business. This means your customer base may be limited. Additionally, you may find moving to a larger office with limited resources challenging, which hinders your business’s expansion.
3. A lot of work
If you feel overwhelmed with your daily tasks, client meetings, generating leads, etc., you may only sometimes consider hiring younger consultants to share the workload. As you already know, consultants are costly. If you hire consultants as your assistants, you must pay their salary.
KEY FACTS AT A GLANCE
- Start-ups in the consulting industry may need help to raise money from venture capitalists and private investors because it is a unique industry.
- Consultants can use their savings to start a consulting business and have complete control of their business.
- Working freelance can help consultants raise money to start a consulting business.
- Freelance consulting platforms like Consultport can be an excellent help for consultants looking to find high-paying freelance projects.
- Advisors can also approach banks to obtain a small loan, although the process can be lengthy and involves risks.
Strategy #2: Indirect funding through freelance consulting
If you are looking into start-up financing, you may have encountered many product-based companies that have secured start-up funding. Consulting, on the other hand, is an entirely different industry. Even if you have no savings and no investor will give you money, you can start a very lucrative consulting business. As a consultant, your knowledge and experience are your greatest assets. You don’t need a fancy office on the 50th floor or a personal assistant to schedule appointments. All you need is a laptop, an internet connection and the ability to network and complete new projects.
For example, suppose a client hires you as a freelance consultant to introduce Agile to their company. In that case, you can quickly develop a strategy, set up the Agile framework, raise short-term sprints, train the client’s team, track the impact of your actions, and much more. Get more work done from the client’s office or the comfort of your home. The only investment on your side is a computer, which you already have.
Profit margins on freelance consulting projects are very high – even more than 90% if you play your cards right. You don’t have to set up a factory, manufacture and distribute products, or process returns. You are the product, and your expertise is what you sell. So, firstly, work on as many freelance projects as possible, make money from them, and invest it in your consulting business.
Advantages
1. A strong foundation
Before diving into the business world, it would be beneficial if you first worked as a freelance consultant for a year. Starting as a freelancer is like starting a one-person business. You will learn the specifics of the market before you even think about start-up financing. This experience is a sure way to build a strong foundation for your future consulting business.
2. Existing customer base
Only start a consulting business after finding clients first. The main reason why most businesses fail is the need for more customers. However, I started out working as a freelance consultant. As you step from freelancer to business owner, you will already have a few clients to bring into your consulting business.
3. References and case studies
When you convert from freelance consultant Chris Johnson to consulting firm Johnson & Associates, you can use client testimonials and case studies of success stories from your time as a freelancer. Before raising funds for your consulting business, ensure you have some client results to position yourself as someone worth hiring.
Disadvantages
1. Look for new projects
Freelance consulting is more challenging than it sounds. Making new contacts, offering services, negotiating daily rates, etc, can be difficult. However, you can sign up with a freelance consultant platform and let them find clients for you. At Consultport, for example, we have over 10,000 consultants in our network that we connect with pre-selected, exciting customers.
2. A lack of consistent income
Unlike a job that pays a fixed monthly salary, freelancing works differently. When freelancing, the frequency of payments can vary from client to client, which can be frustrating.
3. Isolation
Working alone may only be for some. It takes a lot of willpower to do the right thing when no one is paying attention or giving directions. The lack of a close circle of friends in the office can also make some freelancers feel isolated.
Also Read: SWOT Analysis: The Underrated Business Tool
Strategy #3: Small Business Loans
This should be your last option for start-up financing for your business. When applying for a business loan, you must put yourself in the lender’s shoes. The lender will only give you money if they see potential in your business. You must explain your business strategy, expected monthly and annual recurring revenue, risks associated with operating a consulting business, and more. Of course, this has advantages and disadvantages, which we will explain below.
Advantages
1. Business expansion
Getting a small business loan can help you grow your consulting business and take it to the next level. You could hire new employees, work in an office in a convenient location, invest in marketing and advertising, purchase subscriptions to customer management platforms, and more.
2. A much-needed help with cash flow problems
Whether you work as a freelance consultant or run a consulting business, you may experience temporary cash flow shortages that can be quickly addressed with a small business loan. E.g. For example, if you expect a $50,000 payment from a client in 30 days and your office rent is due in 10 days, a temporary small loan could help you bridge the gap.
3. Positive credit rating
If you start with small loans and leave a good impression on lenders by paying the bank back on time, you will be more likely to be trusted with larger loans.
Disadvantages
1. Risk
Let’s face it: borrowing money from a bank involves risk. It’s not like borrowing money from your family – it’s the bank, and they want your money back on time and with interest. If you don’t pay, legal action could be taken against you.
2. Lengthy application process
In most cases, you need help to walk into a bank and get a loan immediately. You must complete a lot of paperwork, check your background, analyze your credit score, and conduct interviews. In some cases, your loan may not be approved on time.
3. Loans from multiple banks
Sometimes, you may need help to get all the money from one bank and need to apply for another loan from another bank or financial institution to finance your start-up. This can also prolong the already lengthy process even further.
Conclusion
Typically, it would be best to have a lot of start-up capital to start a business. However, things are a little different for consulting companies. You could start your own business with few resources if customers are willing to pay. Ultimately, your clients pay you for your expertise, not a fancy high-rise office or a well-designed website. However, you will need financial resources if you want to grow your business long-term and build something spectacular. You can dip into your savings, borrow money from friends or family, use income from freelance consulting, or turn to a bank. It’s your choice.
