Key points
- Professional firms carry weeks of unbilled work before an invoice is raised, then wait again for payment.
- Lock-up, the combined days of work in progress and debtors, is the number lenders look at first.
- Lending is cash-flow based because desks and laptops are not meaningful security, so partner guarantees are the norm.
- Tax bills, PI premiums and partner capital create predictable lumps that are often financed separately.
- Some regulated professions restrict how fees can be assigned, so check with the regulator before using invoice finance.
Cash-flow realities in professional services
Most professional firms bill in arrears. A solicitor records time for weeks, an architect completes a design stage, and only then does an invoice go out. Until then the work sits as work in progress: unbilled time the firm has already paid salaries to produce. Once billed, the client takes 30, 60 or more days to settle.
Add those two periods together and you get lock-up, the days between doing the work and receiving the cash. A firm with 45 days of WIP and 60 days of debtors has 105 days of lock-up, so it is funding over a quarter of its annual fees at any time. Billing sooner and chasing faster is the cheapest finance available, and lenders ask about it first.
Other sector features shape the need for finance:
- Partner drawings and tax reserves. Partners draw against expected profit and pay income tax personally, with payments on account in January and July. Without a tax reserve, those dates create a cash crunch. Companies face the same with corporation tax.
- Professional indemnity insurance. PI premiums are a large annual cost and often a condition of practising. They are frequently spread through premium finance, which is borrowing by another name.
- Regulatory and practising requirements. Some professions require practising certificates, minimum capital or reserves, and strict separation of client money. Client account balances are never available to fund the firm.
- Few tangible assets. The firm's value sits in its people, clients and ledger, so providers lend against cash flow and the quality of the debtor book rather than property or plant.
Finance options that fit professional firms, and why
Unsecured loans
An unsecured business loan is the simplest fit for a profitable firm with a predictable fee base. Terms of one to five years are typical, affordability is assessed on accounts and bank statements, and a personal guarantee is usually required.
Fee, WIP and invoice finance
Invoice finance advances a percentage of billed fees as soon as the invoice is raised. Some providers also fund a proportion of work in progress where time recording is reliable. Confidential invoice discounting is usually preferred so the firm keeps control of client contact. Some regulated professions have rules about assigning fees and client confidentiality. Check with your regulator before committing.
Practice loans
Practice loans are term loans for defined purposes: a partner's capital contribution, buying out a retiring partner, acquiring another practice or fitting out premises. They are assessed on the firm's cash flow and the partner's own position; see also secured business loans where property is offered as security.
Consolidating tax and PI loans, and refinancing
Firms commonly end up with a tax loan, PI premium finance and an overdraft, all repaying at once. Consolidating business debt into one facility can make the outgoing easier to manage, and facilities taken in a hurry around January can be refinanced once the pressure passes. A longer term usually increases the total repaid, and early settlement may carry charges.
Risks specific to professional firms
Personal guarantees from partners. With little security to offer, nearly every facility to a professional firm is supported by partner or director guarantees. In a traditional partnership, partners are already personally liable; in an LLP or company, a guarantee reintroduces that exposure. Understand whether it is joint and several, what happens on retirement, and whether your home could be at risk. See business debt and personal guarantees.
Using finance to fund drawings. Borrowing to maintain drawings when profits have fallen converts a profitability problem into a debt problem and hides it. Drawings should follow profit, and tax should be reserved monthly rather than borrowed each January.
Questions to ask before you borrow
- What is our lock-up today, and how much would faster billing and collection release without borrowing?
- Is this facility covering a timing gap or a shortfall in profit?
- Which partners will guarantee the borrowing, and on what terms?
- Do our regulator's rules permit the fee funding proposed?
- Will repayments fit around the tax dates and the PI renewal?
For ways to shorten lock-up before borrowing, see how to improve business cash flow. If tax is overdue, our HMRC tax debt page explains Time to Pay. Where a firm cannot meet its liabilities, smaller practices can get free, impartial guidance from Business Debtline, and a licensed insolvency practitioner may be needed.
Sole practitioners may also find finance for small businesses with existing debt useful. See the industries overview for other sectors, including manufacturing.
Frequently asked questions
Can a law firm use invoice finance?
Some providers offer facilities designed for law firms, often limited to certain work types and run confidentially. Check the regulator's position on confidentiality and assignment of fees first.
Is it better to take a tax loan or dip into the overdraft?
It depends on cost and headroom. A fixed-term loan spreads the bill predictably, while an overdraft is repayable on demand. Reserving for tax monthly avoids the question.
Do all partners have to give a personal guarantee?
Providers set their own requirements. Many ask for guarantees from all equity partners, often on a joint and several basis. Take independent advice before signing.
Will a new partner's capital loan be assessed on the firm or the individual?
Usually both. The provider looks at the firm's profitability and the partner's expected profit share and credit history. The loan is often in the partner's name, so it affects them personally.