When you compare it with other professions, you will find that accounting experiences a strong seasonal revenue bias. The months of March and April are the peak tax season and accountants are in great demand during these months. However, things aren’t the same during other months. The imbalance in revenue flow can be handled by taking business loans for accountants.
Many traditional lending institutions regard accounting as a high-risk industry due to its seasonal nature.
The Accounting Industry
The tax part is one part of the business of accounting professionals. However, many small accounting firms and sole accounting practices do not think it is easy to meet the demands and opportunities of the tax season. You can work towards the success of your accounting business by securing and servicing new clients if you are able to finance your accounting practice during the tax season.
The revenue generated by the US accounting, payroll, and tax preparation services in 2018 was around 156 billion dollars according to Statista.
The top US-based global accounting and auditing firms, PricewaterhouseCoopers, KPMG, EY, and Deloitte are known as the Big Four. Statista noted that the Big four had about 1 million employees from across the world and the total revenue in 2018 was 148 billion US dollars, with over 56 billion sourced from the US market.
Statista also notes that there were 1.26 million accountants and auditors, as well as 1.53 million accounting, bookkeeping, and auditing clerks in the US in 2018. According to the Insurance Journal, the number of auditors, accountants and related office staff will probably rise to 3.44 million by the year 2022. Out of the US States, California employed the highest number of accountants and auditors, but Washington D.C offered better payments.
According to Franchisehelp.com, small businesses make up the largest portion of taxpayers. Among the small businesses, 37% are run by a single individual and 53% have less than 10 employees. The tax returns involved were in plenty. According to the IRS, over 250 million tax returns were filed in 2018.
How To Handle Growth And Balance Cash Flow?
According to the American Institute of Certified Public Accountants National Map Survey, accountants tend to put more resources into areas of technology, talent training, marketing, and talent retention.
To handle the expenses associated with your accounting practice, you have to find financing from suitable sources. Like all the other professional services, the privacy and security of client information are crucial in accounting practice. Client data security if breached will cause serious losses to the accounting practice and its reputation. Hackers are constantly on the lookout for opportunities to extract important financial information available in the files of accounting firms and capitalize on it.
As per the Insurance Information Institute, the number of victims of identity fraud was 16.7 million. The numbers are on the rise as criminals are engaging in more complex identity fraud schemes. Last year, the amount stolen reached $16.8 billion and as much as 30 percent of the US consumers notified of being exposed to a data breach last year, a 12% increase when compared to 2016. This was the first time in the country when Social security numbers were exposed more than credit card numbers.
Retaining The Employees And Taking Care Of The Staffing Expenses
Getting key employees is a challenging task for any service organization. In addition to having compensation discussions, it is also important to offer incentives by considering the generation that the staff belongs to.
Recruitment of talent and retaining them remains one of the biggest challenges that today’s firms face. According to the Pew Research Analysis of the US Census Bureau Data, millennials make the largest generation of workers, as of 2017. They make about 35% of the total workforce, Baby Boomers one-fourth, and Gen Xers one-third. The participation of different generations gives rise to changes in priorities and work preferences.
Marketing And Retaining The Clients
There was a time when accountants could tell their client lists from memory, but not anymore. Increased competition and growth of franchise accounting chains have brought dramatic changes.
If you have opened a new office, you might need to spend some money on advertising to acquire a new customer base. Remember that you have very effective alternatives to traditional advertising methods including blogging and social media. Improving your social media presence can contribute a lot to establishing the identity of your business.
Creating a blog to publish important information including relevant tips is a useful online advertising strategy. Search online to boost your digital marketing strategies and appear in local searches so that more people connect with you.
Loan Types For Covering Expenses Of Accounting Practice
When it comes to supporting small businesses to manage the flow of income from accounting practice, some types of financing prove more useful than some others. Here is a list of the top five loan types for accounting practice to help you find out the one ideal for the specific needs of your company.
Small Business Administration Loans
SBA loans are regarded as the gold standard in loans by many industries and businesses. Highly favorable rates and terms being offered to people seeking loan financing is the attraction of SBA loans. If the technology investment for your accounting practice will go above $10,000, an SBA loan will be the ideal choice for you.
The SBA does not operate as a direct lender and instead forms partnerships with eligible lenders and offers them a guarantee against default. The SBA can offer up to 85% guarantee to the loan, thereby letting the lenders provide higher loan amounts at more favorable terms to the borrowers.
Qualifying for SBA loans is not that easy and the borrowers are required to submit a lot of paperwork. Because business loans given to accountants are considered to be of higher risk, the approval rate is quite low.
You should have adequate knowledge of the SBA 7(a) loan program that serves the needs of accounting professionals well. Maximum loan amounts, impressive interest rates, repayment horizons, and flexibility in using funds are its key features.
The loan amounts provided are between $5000 and $5 million and the repayment term is 5 to 25 years. The starting rate of interest is 6.75% and it takes approximately 6 weeks for the loan to get approved.
Traditional Bank Loans
Small businesses still depend mostly on traditional banks for loans. Most businesses find a way to secure some funding through the bank where they have a merchant account.
The larger national banks usually launch loan programs that are specially meant for accounting professionals. The high attrition rate characteristic of accounting practices explains why banks consider loans for accountants a high-risk proposition. They generally set stricter standards when it comes to financing for accounting practice.
Bank terms do not seem as favorable as SBA-backed loans. The loan amounts offered are between $30,000 and $5 million and the maximum allowable repayment term is up to 10 years. The interest rates start at 7% and it takes about 4 weeks on an average for the loan to be approved.
The accelerated approval procedure is the key feature of non-bank lenders like Kabbage, and OnDeck. These lenders have lower credit requirements, shorter approval cycles, and less paperwork when compared with the other financing sources mentioned above.
In return for the lower credit standards and faster approval cycles, the lenders often charge higher fees and interest rates. The accounting professionals taking the loans should be well aware of this. If you are looking for a quick way to find financing for your accounting practice, it is advisable to look for a non-bank source. Keep in mind that non-bank lenders and banks will not necessarily be subject to the same regulations and read the entire document carefully before you sign it.
The loan amounts offered by non-bank lenders are between $25,000 and $250,000 and the repayment term is between 3 and 18 months. The interest rates start at 10% and the approval can be obtained as fast as a business day.
Business Line Of Credit
A business line of credit can be simply regarded as a mix of a business loan and a business credit card. It is ready cash that you can draw up to a previously agreed-upon limit. Similar to a business loan, the financing offered by an unsecured line of credit can be used to take care of general business expenses. There isn’t a lump-sum disbursement and the business owner borrows what he needs and pays interest for the same.
Like in the case of a credit card, the capital available and the payments are revolving and are subject to annual review. The interest starts accruing only from the point when money is drawn and it applies to the borrowed amount alone. The lender will set a limit on the amount that the business may borrow. Banks or alternative lenders may provide one with a business line of credit.
For someone who is considered a marginal credit risk, getting a business line of credit is really easy. But if your credit score is impressive, you have the opportunity to negotiate the rates and terms. It is always recommended to shop around because there can be a significant fluctuation in rates. A line of credit or some other revolving credit line that is offered by a bank will be a big help for you in licensing or purchasing technology.
The loan amount offered in a business line of credit is between $10,000 and $1 million, with the repayment term being 6 months to 5 years. The interest rate is between 7% and 25%. The shortest time for the loan to get approved is one business day.
Merchant Cash Advance(MCA)
With more and more people preferring to make payments for their tax preparation with a credit card, a merchant cash advance can be considered a really effective financing option. An MCA is commonly granted through a debit/credit card payment processor and is repaid with proceeds that are generated from electronic payment sales carried out by the business.
Consider for instance you want to add seasonal staff in January to the end of the primary tax season in the month of April. In this circumstance, you will be able to get a merchant cash advance at the start of January and make use of the MCA for paying the staff. You can then repay the MCA via customer credit card payments that are made over the coming months.
Note that an MCA often has higher fees and costs than most other forms of borrowing. Despite that, MCA is still a viable option for your business.
Accounting practices are seasonal and this nature is the major reason why banks and financial institutions think that lending to business accountants has high credit risk. However, seasonality is not the exclusive factor that influences the loan approval from any source. Like you do with every other business of yours, prepare a comprehensive business plan for the accounting practice too.
Preparing a business plan for your accounting practice with projections and financial history is critical in making your case to a lender. If you have an accounting specialty like tax preparation for people who are into sales business or payroll service for small businesses, you can make attempts to prove your expertise in that particular area. Banks and credit unions check a company’s perceived risk as well its efficiency in navigating its marketplace to arrive at the final decision regarding loan approval.
As a rule of thumb, start with a bank that you already established a connection with for personal or business banking and speak with a loan officer to find out if you are eligible for getting financing from the bank. Do not stop there; shop around to find out all the options you have and analyze each one of them. The repayment terms and loan rates of different sources can largely vary from one another eventually affecting your cost of funds.