Funding in the professional services sector

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As many will know, accessing funding in the professional services sector can be a challenging task with most firms being short on tangible assets for security purposes and potentially long on work in progress lock up, especially where conditional fee arrangements are involved. In reality, the most valuable assets are people, and try offering those up as security for your loan or overdraft!

Historically, funders have tended to blow hot and cold with regard to law firms with the appetite for lending variable dependent upon how sector sentiment is running. However, that need not be an obstacle to securing the cash you need and it is worth re-focusing on some of the key drivers.

Financial management – You need to be able to demonstrate sound financial management, particularly working capital management through regular client billing of time spent and disbursements. Allied to this is the ability to produce accurate and timely management information.

Client base –  Ideally there should be a good spread of quality clients and sources of profitable repeat work. Over reliance on a few major clients may be seen as a potential weakness.

Nature of specialism – Firms that specialise to any material extent in work which necessitates lengthy lock up, for example conditional fee arrangements, clinical negligence and criminal cases or where the outlook is less favourable, for example legal aid, tend to be viewed less positively.

Sustainable drawings policy – Where drawings are at a level where inadequate profit retention is demonstrated, or worse still, where these result in increased borrowings, it will have a negative impact on lending appetite.

Partner/staffing structure – There will often be an optimum partner/staffing structure which will maximise profitability and cash flow. It could be a negative sign if this is deemed to be too top heavy where there is insufficient delegation of work and high salary levels which depress profitability.

Reputation – A firm’s reputation and its profile in any specialist areas are critical in attracting and retaining the “right people”, which in turn can stimulate a lender’s confidence in the business. For example, a firm with a poor claims record and higher than normal Professional Indemnity Insurance premium would be looked upon less favourably.

Of course, if it is funding for an acquisition that you are looking for, the issues can be somewhat more demanding and also complicated by the funding position of your target, all of which will have an effect of the price of the acquisition and how it needs to be structured, i.e. over what period of time can you afford to pay the vendors. Conversely, as a vendor, your business will look more attractive if a purchaser is not inheriting your cash flow and funding issues.

So, if any of this rings a bell, please get in touch for a no obligations discussion.

Jim Akrill, Corporate Finance Partner (Jim.akrill@pmm.co.uk).