Professional practice finance: funding for professional firms

Professional firms often have few hard assets but dependable, recurring fee income, qualified principals and regulatory oversight. Specialist lenders take this into account, which can make unsecured borrowing easier to arrange than for a business with a similar turnover in another sector. The flip side is that lenders look hard at how concentrated the fee income is, how quickly work turns into cash and how much the firm depends on one or two principals.

Most established professional firms qualify for some form of finance when they have qualified, registered principals, steady fee income spread across many clients or patients and a reasonable credit record; sole practitioners, partnerships, LLPs and limited companies can all borrow. Lenders typically look at:

• Fee income: its size, how recurring it is and the spread of clients or patients
• Accounts: filed accounts and up-to-date management figures
• Cash conversion: work in progress, debtor days and lock-up
• Existing borrowing: bank statements, current facilities and HMRC position
• Credit history: of the practice and its principals, partners or members
• Standing: professional qualifications and regulatory record
• Security and guarantees: personal guarantees from partners or directors are common on unsecured lending

A weaker credit history reduces options but does not always rule a firm out, particularly where fee income is stable and past problems are older or settled.

Security on professional practice finance depends on the facility and on how the firm is structured. Unsecured loans and tax funding usually rely on personal guarantees from the partners, members or directors, while premium finance is typically backed by the funder's right to cancel the policy if instalments are missed. In a traditional partnership the partners are already jointly liable for the firm's debts, whereas LLP members and company directors are exposed only to the extent they guarantee. Equipment and clinical kit on asset finance is secured on the items themselves. Practice acquisitions are typically secured by a debenture over the buying entity, sometimes with a charge over the target's shares, plus guarantees, and premises purchases carry a legal charge over the property. Our guide to debentures and charges explains how these fit together.

Timescales for professional practice finance typically range from a few days to several months, depending on what is being funded. Tax funding, PI premium finance and unsecured loans to established firms are usually the quickest, often within days to a couple of weeks once accounts and bank statements are supplied. Equipment finance follows the supplier's quote. Practice acquisitions take longest: due diligence on fee income, regulatory steps and the sale contract commonly mean two to four months or more, and some deals depend on outside approvals, such as CQC registration for a new healthcare provider or NHS contract changes for dentists, GPs and pharmacies. Premises purchases follow the usual valuation and conveyancing timetable. Your profession's own page gives more detail.

Professional firms can often reduce or avoid borrowing by improving how quickly work turns into cash. Billing on account, interim billing on long matters and tighter fee collection shorten lock-up, which is often the real cause of a cash squeeze in law and accountancy firms. Partners can inject capital, or a new partner's buy-in can be timed to fund investment; see partner buy-in finance. On acquisitions, sellers frequently accept part of the price over time, as explained in our guide to vendor finance and deferred consideration. Some insurers and brokers will spread a PI premium by instalments directly. Where tax is the pressure, HMRC's Time to Pay is worth comparing with a tax loan.