Lines of credit: A flexible funding solution for professional services firms

Cash flow pressure is not unusual in professional services firms. Whether a law firm waiting on the completion of a transaction or an architect managing phased project billing, many firms experience periods where cash is tied up in debtors or work in progress.

Against a backdrop of rising employment costs, continued economic uncertainty and increased investment in technology, many are placing greater emphasis on maintaining financial flexibility. Even profitable businesses can experience temporary cash flow gaps, prompting some to review whether traditional funding options remain the best fit for their needs.

Traditionally, overdrafts or loans have been the go-to solution for short-term funding needs. But increasingly, professional firms are exploring lines of credit as a more flexible and secure alternative.

A line of credit is a fixed-term credit agreement that gives businesses access to an agreed funding facility, drawing down funds only when needed. Unlike a traditional loan, interest is typically only charged on the amount actually used, rather than the full facility.

That flexibility can make a significant difference for professional firms, where income patterns are often inconsistent throughout the year.

Flexibility for variable workloads

Firms often experience fluctuating workloads and seasonal billing cycles. Legal firms may have peaks around property transactions or year-end deals. Surveyors and architects can face delayed payments linked to project milestones.

At the same time, many of their largest costs remain fixed.

Staff costs are typically the biggest outgoing for professional firms, alongside professional subscriptions, regulatory memberships and insurance premiums. Unlike product-based businesses, professional services firms often have relatively few suppliers offering extended credit terms, leaving fewer options to ease short-term cash flow pressures.

This can create a difficult balancing act when revenue is locked up in unpaid invoices or unbilled work. A line of credit can help bridge those gaps, providing access to working capital without committing the business to borrowing more than it needs. 

Lines of credit versus overdraft and loans

Traditional loans typically require the borrower to take all funds at the point of issue, with a fixed rate of interest payable monthly irrespective of whether the business needs all the funding at that point in time or not.

Lines of credit, by contrast, are usually structured as signed, fixed-term agreements with agreed borrowing limits and repayment terms, with interest charged only when funds are drawn down.

Whilst this is a similar arrangement to an overdraft, a key attraction of a line of credit is the additional security and certainty it can offer compared with a traditional overdraft. Overdrafts are often repayable on demand, meaning lenders can reduce or withdraw facilities relatively quickly if a business’s financial position changes or its credit profile deteriorates.

A line of credit therefore combines the security of a traditional loan with the flexibility of an overdraft to provide a well-balanced solution to cashflow pressures for professional services firms.

While some lenders may still require personal guarantees, particularly for newer businesses with little trading history, more established firms with a strong track record may be able to secure line of credit facilities without them.

Why FRS102 matters

Changes under FRS102 reporting regulations are also prompting some professional firms to review their funding arrangements.

The accounting changes are expected to bring more liabilities onto balance sheets, potentially affecting covenant calculations and credit assessments. Professional services firms may be particularly exposed because of the way revenue, work in progress and some leases on property are recognised within their accounts.

For firms relying heavily on overdrafts, there is concern that changes in reported financial metrics or covenant breaches could lead to facilities being reduced or withdrawn.

This is leading some businesses to explore more stable, contracted funding arrangements before any issues arise.

How we can help

Not all mainstream banks actively offer lines of credit, particularly for smaller professional services firms. In many cases, specialist lenders may provide more flexible terms or a better understanding of the challenges professional firms face.

Our experts advise firms on cashflow forecasting and budgeting to help firms identify where the financial gaps are or where they may emerge. The firms’ funding team has access and relationships with many specialist lenders and can help professional services firms access and assess the most appropriate options, compare rates across a wide lender panel and structure facilities that align with operational cash flow requirements.

We can also help firms review their credit profile ahead of funding applications through our  Credit Confidence package.  It improves the quality of information presented to lenders potentially supporting access to more competitive terms.

As professional services firms face increasing pressure to manage working capital while continuing to invest in growth, reviewing funding arrangements has become an important part of financial planning. A line of credit may not replace every overdraft or loan, but for many firms it could provide a more resilient and practical funding solution.

For more information on lines or credit and other sources of funding, or assistance with determining funding needs, please get in touch.