Finance for professional services firms

Professional services firms sell expertise by the hour or by the job, and most of their cash is tied up between doing the work and being paid for it. That gap, often called lock-up, is the cash-flow story of every consultancy, law firm and design practice. Finance should shorten it or bridge it, and it should cost less than the fees it releases.

Who this page covers

Consultancies, solicitors, architects, engineers, surveyors and similar practices, if they trade as a limited company. Our current funding partner doesn't take accountancy, tax, insurance or financial services firms right now. That's on us, not you. Staffing agencies are also outside what our partner takes at present.

The cash-flow shape of a professional firm

Work in progress. Hours are recorded but not yet billed. Fixed-fee jobs are billed at stages; contingent work may not be billed for months.

Debtors. Once billed, clients pay on their terms. For business-to-business deals an agreed payment date must usually be within 60 days. Public-sector clients and large corporates set their own processes, and a missing purchase order number can add weeks.

Costs. Salaries, professional indemnity insurance, practising fees and rent. Many are annual and paid up front, so the cash pinch bunches around renewal dates and the tax year.

Add the two waits together and a firm can carry months of fees in its WIP and debtor book. That is why a profitable practice can still struggle to pay a quarter's bills.

Which finance fits, and which doesn't

• Invoice finance for issued invoices to business clients. Confidential invoice discounting lets you keep control of client relationships.
• Revolving credit facility for the general lock-up gap, drawn and repaid as fees come in.
• Business loans for planned spend: a new office, a team hire, buying a retiring director's shares.
• Fee-funding for annual costs: some insurers and bodies offer monthly payment for indemnity insurance or fees. Compare the cost with other options.
• Rarely a fit: merchant cash advances. Clients pay by bank transfer, and a firm with a solid debtor book can usually find cheaper money.

What it costs: a worked example

Say the firm borrows £100,000 at 18% APR over 24 months to buy out a retiring director, repaid monthly.

• Monthly repayment: £4,992.41.
• Total repaid: £119,817.84.
• Interest: £19,817.84.

Sterling's rule of thumb calls under 20% "priced like bank lending". The test is whether the fees the remaining team bills, after salaries, cover £4,992.41 every month for two years. Compare that with a 6-month advance at a factor rate of 1.45 for £50,000: £72,500 back, 126 daily payments of £575.40, about 158% APR, "very expensive". The repayment calculator on this page lets you test other rates and terms.

If clients pay late, you can claim statutory interest at 8% plus the Bank of England base rate on business-to-business debts, unless your contract sets a different rate. Many firms never use it with valued clients, but putting it in your terms changes the conversation.

What funders typically ask a professional firm for

• Filed accounts. A private company has 9 months from its accounting reference date to file, so the public picture can lag well behind your current numbers. Bring management accounts.
• Aged debtors and a WIP report, showing how long fees take to turn into cash.
• Bank statements for the last several months.
• Client concentration: the share of fees from your largest clients.
• Shareholder and director details, especially if the finance is for a buyout.

A personal guarantee from directors may be required, and a funder may run a credit search, which could be a soft search.

Red flags specific to professional firms

1. Borrowing to cover lock-up that keeps growing. If WIP and debtors grow faster than fees, finance only hides the problem. Fix billing first.
2. WIP counted as cash. Unbilled time has no agreed value. Finance that assumes it will all be billed and paid is optimistic.
3. The wrong entity. Many practices are LLPs or partnerships. Ask Sterling's route is for limited companies only, and introducing small partnerships is regulated credit broking. Business finance for limited companies is not regulated by the Financial Conduct Authority.