When you start any business, financing can be one of the trickiest aspects to come up with! There are several options however, and any one of these could work for running your consulting business.
One of the most important things though, whether you are looking for startup or expansion capital, is to make sure you know exactly how much you need.
Statistically, many new businesses fail because the entrepreneurs involved over estimate profits, and underestimate funding requirements. That is not to say that you should inflate your budget, but you should spend a considerable amount of time figuring out just how much you will need to get started, and keep going!
There are two main categories of funding:
1. Debt financing
Debt financing means you make a loan, with a fixed repayment period and installment, from a financial institution or, in some cases, a private individual.
There are some government sponsored or semi private organizations, such as the US Small Business Administration that offer viable small businesses debt financing in the form of business loans, with lower interest rates, which make them an attractive proposition.
Be warned however – debt financing is notoriously difficult to obtain, and lenders are extremely risk averse. You really need to have your ducks in a row before you try this route!
There are benefits to this type of financing however, if you are able to obtain it. Most notably, since the transaction is a loan, which must be repaid, you do not lose any ownership or control, as you would in the case of equity finance as discussed below.
Therefore, while debt finance may be difficult to come by, and more costly in the short term, one day, when you have a successful business, it is completely yours.
2. Equity finance
Equity finance is based on providing a financier, or investor, with a share in the company in return for their investment.
It can entail giving away a large chunk of your business to an individual or consortium, but it has the benefit of being non-repayable, so your monthly expenses will not include servicing a loan.
While some entrepreneurs may shy away from this type of finance, wanting to maintain control and ownership of the entire business, it is always good to ask yourself whether you would rather have 100% of nothing, or a large percentage of a successful business.
Equity finance deals can conclude any one of a number of ways. Either your consulting business can be sold, with the profit from the sale being split according to ownership between yourself and the investor, or the company can list on a stock exchange, again, with the proceeds split proportionately.
Another option is to buy out the investor at the end of a prescribed period, for the percentage of the market value of the company at that time. This is attractive, because it means that at the end of that period, you regain ownership and control of your whole consulting firm.
Equity financiers generally have a higher appetite for risk than their debt finance counterparts, and may invest in businesses that cannot obtain debt finance.
They do however sometimes take a hands on role in the companies they invest in, which may be a negative point, although, if they are experienced, they may become valued mentors.
Ultimately, while you may have preferences as to which type of finance you would like to opt for, it will depend on the decision makers in the commercial finance institutions, or the investors themselves, which type of finance you can obtain, if any.
What you can do is spend as much time as possible on your consulting business plan, and approach these investors armed with a watertight, well thought our document, for a business that they would want to invest in.