There are few professions that experience seasonal revenue bias to the extent that accounting does. March and April are the height of tax season, and most accountants are booked solid during these months. Business loans for accountants can help bridge the gap in this somewhat lumpy revenue flow.
As a caveat, the accounting industry is considered high risk by many traditional lending institutions due to its seasonality.
So, You Want to Be an Accountant
Tax preparation is only part of the business of accountants. However, it can be a challenge for many smaller accounting firms and sole accounting practices to meet the demands and the opportunities that tax season brings. The ability to finance your accounting practice during the tax season can have a profound effect on your ability to grow your business by securing and servicing new clients.
The 2018 revenue of the U.S. accounting, tax preparation, and payroll services industry was estimated to generate around 156 billion dollars, according to data from the research firm Statista.
The leading global accounting and auditing firms based in the U.S. are known as the Big Four: Deloitte, PricewaterhouseCoopers, EY, and KPMG. In the same report, Statista noted that together, the Big Four employed about 1 million people across the globe, reporting a 2018 total revenue of over 148 billion U.S. dollars, with just over 56 billion coming from the U.S. market.
Statista further notes that 2018 showed 1.26 million accountants and auditors, and 1.53 million bookkeeping, accounting, and auditing clerks in the U.S. The Insurance Journal reports that the number of accountants, auditors, and associated office staff is due to rise to 3.44 million by 2022. California employed the most accountants and auditors of all the states, but Washington, D.C paid them the best.
Finally, Franchisehelp.com says:
The vast majority of tax preparers are small businesses – 37% are run by a single person, while 53% employ less than 10 people. There were plenty of tax returns to go around – the IRS reported that there were over 250 million tax returns filled in 2018.
Financing for Accountants: Managing Growth and Balancing Cash Flow
The American Institute of Certified Public Accountants (AICPA) National MAP Survey, recommends that accountants put resources toward the areas of talent training, talent retention, technology, and marketing.
Expenses for Accounting Practices: Financing Your Accounting Practice
Technology and Cybersecurity. Like other professional services, the fidelity, privacy, and security of client information is critical to the accounting practice. A breach of client data security could be catastrophic to an accounting practice. The black market incentive is at an all-time high for hackers to surreptitiously capitalize on the wealth of financial information available in an accounting firm’s files.
The Insurance Information Institute reports:
There were 16.7 million victims of identity fraud, a record high that followed a previous record the year before. Criminals are engaging in complex identity fraud schemes that are leaving record numbers of victims in their wake. The amount stolen hit $16.8 billion last year as 30 percent of U.S. consumers were notified of exposure to a data breach last year, an increase of 12% from 2016. For the first time, more Social Security numbers were exposed than credit card numbers.
Staffing Expenses and Employee Retention
Attracting key employees is a challenge for any service organization. Aside from the obvious compensation discussions, providing generation-appropriate incentives is crucial to retaining employees, as major demographic shifts are underway.
Recruiting and retaining talent continue to be among the most significant challenges for today’s firms. According to a Pew Research Center analysis of U.S. Census Bureau data, as of 2017 (the most recent year for which data is available), Millennials are now the largest generation of workers: They comprise 35% of the workforce, Gen Xers one-third, and Baby Boomers one-quarter. This multi-generational shift continues to bring with it changing work preferences, priorities, and motivators.
Marketing and Client Retention
There was a time when accountants could find their client lists from word of mouth alone. Those days are, for the most part, over, due to increased competition and the proliferation of franchise accounting chains. Large franchise firms such as H&R Block and Jackson Hewitt are spending millions on consumer advertising, making the field a much more competitive landscape.
If you are opening a new office, you will likely need to advertise in order to acquire a base of new customers. But keep in mind, there are alternatives to conventional advertising, such as social media and blogging. By making yourself available to social media groups and offering helpful tips, you can easily build a local following that could support your business.
Creating a blog and publishing tips on popular subjects is another online strategy. Check into Google My Business to learn how you can appear in local searches for your area of expertise.
Financing for Accountants: Ideal Loan Types for Accounting Practice Expenses
Some kinds of financing are better suited than others when it comes to helping small business owners manage the ebbs and flows of accounting practice income. Here is a curated list of the top 5, to help you figure out what might work best for your company’s specific needs.
Small Business Administration Loans (SBA Loans)
SBA loans are known across many industries as the gold standard of loans. They offer the most favorable rates and terms for borrowers seeking term loan financing facilities. If your technology investment will exceed $10,000 for your accounting practice, the SBA should be your first choice.
The SBA is not a direct lender; rather it partners with qualified lenders and provides guarantees to lenders against default. The SBA can guarantee up to 85% of a loan, allowing the bank or other lender to offer borrowers higher loan amounts on more favorable terms.
SBA loans are notoriously difficult to qualify for, and require borrowers to submit a substantial amount of paperwork. Given the high risk associated with business loans for accountants, the SBA Loan program has a lower approval rate for this field of practice.
In particular, when seeking an accounting practice loan, you will want to pay close attention to the SBA 7(a) loan program. This program has features that align well with the needs of the accounting professional, including its maximum loan amounts, repayment horizons, interest rate, and flexibility in the use of funds.
What to expect:
Loan Amounts: $5,000 to $5 million
Repayment Term: 5 to 25 years
Interest Rates: Starting at 6.75%
Time for Approval: Approximately 6 weeks
Traditional Bank Loans
Traditional banks are still the leading source of small business loans. Most businesses will find that they are able to secure some level of funding through the bank where they already have a merchant account.
The larger national banks usually have loan programs designed especially for accounting professionals. Once again, the high attrition rate of accounting practices makes loans for accountants a higher-risk proposition for banks; generally speaking, they will have stricter standards for financing an accounting practice.
Bank terms are not generally as favorable as SBA-backed loans, but here is what you might expect from a bank loan:
Loan Amounts: $30,000 to $5 million
Repayment Term: Up to 10 years
Interest Rates: Starting at 7%
Time for Approval: average 4 weeks
Non-bank lenders such as Biz2Credit, Kabbage, and OnDeck provide financing for accountants on an accelerated approval basis. These lenders tend to have shorter approval cycles, lower credit standards, and less paperwork than the other sources mentioned above.
Accounting professionals should expect that there will likely be higher interest rates and fees associated with the convenience of faster approvals and lower credit standards. If you require a quick solution to your accounting practice financing needs, an alternative lender or non-bank source may be the right solution. Always be aware that non-bank lenders are not subject to the same regulations as banks are, and that you should read your funding documentation carefully before agreeing to the terms.
What to expect from non-bank lenders:
Loan Amounts: $2,500 to $250,000
Repayment Term: 3 to 18 months
Interest Rates: Starting at 10%
Time for Approval: As fast as 1 business day
Business Line of Credit
A business line of credit is ready cash that you may draw upon up to a preset limit. Think of it as a hybrid between a business loan and a business credit card. Like a business loan, an unsecured line of credit provides financing that can be used for general business expenses. Like a credit card, there is no lump-sum disbursement; a business owner borrows only what is needed and only pays interest on the amounts borrowed.
Also like a credit card, both the amount of capital available and the payments are revolving, and subject to annual review. Interest begins to accrue only when money is drawn (borrowed), and interest applies only to that amount. The lender will set a limit on the amount the business may borrow. Business lines of credit can be obtained through banks or alternative lenders.
A business line of credit can be an expensive proposition for someone considered a marginal credit risk. However, if you have a strong credit profile, you can negotiate rates and terms. The best advice is to shop around, rates can fluctuate greatly. A line of credit or other revolving credit line offered by a bank can be an ideal option for your technology purchase or licensing.
What to expect from a business line of credit:
Loan Amounts: $10,000 to $1 million
Repayment Term: 6 months to 5 years
Interest Rates: 7% to 25%
Time for Approval: As fast as 1 business day
Merchant Cash Advance
With more people paying for their tax preparation via credit card, a merchant cash advance may be a viable financing option. A merchant cash advance is usually granted through a credit card/debit card payment processor, and is repaid with proceeds that are generated from electronic payment sales.
For example, if you need to add seasonal staff in January through the end of the primary tax season in April, you might get a merchant cash advance at the beginning of January and use that to pay staff. Then, you would repay advance through customer credit card payments over the next few months.
Know that a merchant cash advance often carries higher costs and fees than other forms of borrowing. Despite this, it still might be the right option for your business.
Financing for Accountants: Summary
Due to the seasonal nature of accounting practices, many financial institutions and banks view business lending to accountants as high risk. However, seasonality alone is not the determining factor in getting a loan from any source. You will need to prepare a comprehensive business plan for your accounting practice, just like any other new business.
Writing a business plan for your accounting practice with financial history and projections is a large, critical part of making your case to a lender. In particular, if you have an accounting specialty, such as payroll services for small local companies, or tax preparation for people who earn a living from sales jobs, you can demonstrate a focus and show your expertise in this area. Banks and credit unions often make subjective decisions based on a company’s perceived risk combined with a its ability to navigate its marketplace.
As a rule, it is best to start with the bank where you do your business or personal banking and speak with a loan officer about whether you qualify for financing there. But don’t stop at your home bank; shop around and get to know your options. Loan rates, terms, and repayment horizons can vary greatly, affecting your cost of funds.