Finance for IT services companies and MSPs

IT services firms come in two cash-flow shapes. Managed service providers bill monthly for support contracts, so income is steady and predictable. Project houses and consultancies bill on milestones, so they pay engineers for months before a payment lands. Funders treat the two differently, and you should pick finance to match the one you are.

The cash-flow shape of an IT services company

Recurring contracts (MSPs). Monthly or annual support, licences resold with a margin, and hardware refreshes. The income is steady, but there are upfront costs: onboarding a new client, buying hardware for them, and annual software licences often billed to you in advance and to the client monthly.

Projects. Development, migrations and implementations billed at milestones. Staff costs run every month. If a milestone slips, the invoice slips with it, and the client's payment terms start only after sign-off. For business-to-business deals an agreed payment date must usually be within 60 days.

Both shapes share one feature: your biggest cost is people, and people want paying monthly whatever the client does.

Which finance fits, and which doesn't

• Revenue-based finance fits MSPs and SaaS-like firms with steady recurring income. It is repaid as a share of revenue, so a slower month means a smaller payment.
• Invoice finance fits project houses with business clients on credit terms, once invoices are raised and accepted.
• Business loans fit a planned step, such as hiring a team ahead of a signed contract or buying another MSP's client book.
• Asset finance fits hardware you buy and resell to clients on a monthly plan, and your own kit.
• Rarely a fit: merchant cash advances. Clients pay by bank transfer, not card, so an advance would be collected by fixed debits at a high price, and a firm with contracted recurring income can usually do much better.

What it costs: comparing two offers

The offer checker on this page is built for this. Here are two ways to raise £100,000.

The advance costs less in pounds because it is repaid in half the time. Per pound per year, the loan is cheaper. Sterling's rule of thumb calls 18% "priced like bank lending" and 28.5% "in line with many online term loans". The right choice depends on whether your cash flow can carry a £456 debit every working day or prefers one payment a month, and on what the money earns while you have it.

What funders typically ask an IT company for

• Filed accounts. A private company has 9 months after its accounting reference date to file, so your latest public accounts can be well behind your current numbers. Have up-to-date management accounts ready.
• Bank statements for the last several months.
• A contract schedule: monthly recurring revenue, contract terms, renewal dates and notice periods.
• An aged debtor list for project work.
• Customer concentration: the share of revenue from your largest clients.

Red flags specific to IT services

1. Pricing set as if you were a risky business. A firm with signed multi-year contracts shouldn't accept the price of money meant for patchy card takings. Ask for a quote on revenue-based finance or a loan as well.
2. Milestones financed as if they were invoices. Work that hasn't been signed off isn't an invoice yet, and funders treat it as riskier.
3. Licence costs out of step with billing. If you pay a vendor annually and bill clients monthly, finance sized on monthly revenue may land in the wrong month.

Late payers on business-to-business debts can be charged statutory interest at 8% plus the Bank of England base rate, unless your contract sets a different rate.

Limited companies only

Ask Sterling only introduces limited companies, because introducing sole traders and small partnerships is regulated credit broking. Business finance for limited companies is not regulated by the Financial Conduct Authority.