Kevin Flowerday – Head of Professional Lending – United Trust Bank
2015 could well be the year when many professional services firms seek to capitalise on the improving economic environment and grow their businesses. In most cases deciding how a legal practice or accountancy firm, for example, wants to grow is an evolutionary process taking into account their current client base, skill sets of the partners, demographics of their area and any relevant regulatory changes. Deciding how to fund expansion requires additional skills that often aren’t readily available within the company.
Raising capital to fund growth has historically been the responsibility of the individual partners rather than the firm itself, although within a partnership this can be construed as one and the same, as the profits of a partnership are usually only retained for adequate working capital with very little provision for growth. Partners either use their own personal financial resources to fund growth, or borrow individually to inject capital into the firm. Alternatively the firm itself can look to raise capital either through third party investment or agreed financing through banking partners.
Growth by acquisition/mergers are more traditionally financed by an appropriate debt vehicle as there are predictable costs, known revenues and time based cost savings that will show a broad return on capital, indicating a specific repayment plans over a specific term.
But when growth occurs as a consequence of increased activity, economic growth or new fee earners it’s much harder to forecast when they will happen, when the return on capital will be received, how much capital is required and for what period. Organic growth for firms generally leads to more upfront costs through case acquisition, disbursements and administrative services. When combined with the debtor days and “lock up”, cash becomes the deciding factor when companies decide how to fund their growth.
The bank overdraft is the mainstay of cash flow management for any business. However it can be hard to vary significantly for short-term instant requirements particularly as variable rate, on-demand finance is one of the areas that some banks want to reduce their exposure to. Also, increasing facilities for short periods can incur high facility fees and there’s a danger that an increased overdraft can get lost in the daily trading of the firm and the increased limit becomes the new normal.
Another option becoming increasingly popular is a working capital specific fixed rate term loan. Many firms are now seeking short term working capital facilities from specialist funders that will cover working capital requirements that either sits outside of an overdraft facility or compliments it. These types of loans can be suitable for specific large annual outlays including insurances and regulatory certificates, cash management through a period of high invoicing and long debtors, funding work in progress and instant requirements for short term working capital such as that required to settle tax and VAT bills.
The challenge for many firms is often in finding a funder which understands the workings of a professional firm and can provide a quick and decisive funding solution when they need it most. United Trust Bank has that knowledge and experience and is working with brokers to assist growing professional services firms in 2015 and beyond.