An Alternative Financing Solution to Unsecured Loans for Professional Service Companies
Content
A global revolution, driven by data availability and artificial intelligence (AI), is reshaping industries, and prompting significant growth in the UK professional service industry. The surge in demand for digital transformation, energy, and net-zero consultancy has led to remarkable expansion, nearly doubling the sector’s revenue from £10.56bn in 2018 to £20.4bn in 2023. As businesses worldwide reorganize to incorporate new practices and technologies, the UK consulting sector continues to grow both domestically and internationally. UK business services are now the second-largest worldwide, with exports accounting for 28% of total revenue, up £3bn in just five years.
Middle-market professional services firms benefit most from this surge, outpacing larger firms due to their agility, broader experience, and personalised service. These firms can move quickly to adapt to changes, and their ability to offer customized solutions gives them an edge in the competitive marketplace. However, this growth comes with its challenges. These firms must continuously invest in staffing, ongoing training, and infrastructure to stay competitive. This demands a flexible financial structure that can support expansion while adapting to the evolving market.
This article examines the growth opportunities, challenges, and effective financing options available to professional service firms. Keep reading to discover an alternative financing solution to unsecured loans.
The growth opportunity for professional service firms
Across the globe, industries are facing immense challenges as economic pressures mount. In response, firms increasingly rely on data-driven insights to guide strategic decisions, enabling them to adapt to rapidly changing market conditions. As businesses seek to integrate new technologies and optimise their operations, the demand for professional service companies is growing significantly. These firms are pivotal in helping organisations leverage data, drive innovation, and stay ahead of competition in an ever-evolving landscape.
The growth trajectory for UK consulting firms is clear, with new opportunities emerging locally and globally. However, seizing these opportunities requires continued talent, technology, and infrastructure investment. Professional service firms need access to financing solutions to support these investments and help them scale efficiently.
The Challenges of Expansion
UK business services companies face several challenges, including talent acquisition, regulatory compliance, and intense market competition. As firms expand, staying compliant with evolving laws and differentiating themselves in a crowded market becomes increasingly difficult. Economic uncertainty and the need to adopt new technologies, such as AI and automation, further complicate growth.
To address these challenges, professional service firms need flexible financing solutions that support expansion, enhance infrastructure, and maintain competitive advantage while ensuring agility in fluctuating market conditions. As service industry companies have few tangible assets, such as equipment or large property holdings, many turn to unsecured loans as funding solutions to support expansion. However, unsecured loans have disadvantages for middle-market professional service companies needing a cost-effective funding solution.
The disadvantages of unsecured loans
The disruptions of the global pandemic and the economic uncertainty that followed have diminished financial structures across most industries, affecting clients’ financial health. In turn, this has caused cash flow disruptions despite increased demand for professional services as clients postpone or cancel contracts and delay payments.
Disrupted cash flow weakens financial ratios and performance levels deteriorating companies’ creditworthiness. For undercapitalised professional service companies, this results in significant disadvantages when seeking an unsecured loan.
The disadvantages associated with unsecured loans include the following:
- Strict Approval Criteria: Borrowers with diminished credit may struggle to get approved for an unsecured loan.
- Higher Interest Rates: Unsecured loans are riskier for lenders, resulting in higher interest rates than secured loans.
- Lower Loan Amounts: Due to the lack of collateral in an unsecured loan facility, the loan amount offered may be lower than what is available with a secured loan.
- Repayment: Unsecured loans are typically repaid in fixed monthly installments over a set term, ranging from months to years.
- Default Consequences: If the borrower fails to repay the loan as agreed, the lender may take steps to collect the debt, including hiring a collections agency or taking legal action. Since unsecured loans have no collateral, the lender cannot seize assets, but they can report the default to credit agencies, which can negatively impact the borrower’s credit score.
A better financing solution for professional service companies is an easy-to-acquire flexible funding option based on accounts receivable invoices.
Flexible financing based on account receivable invoices
While unsecured loans offer access to capital without collateral, businesses should be mindful of the higher interest rates and repayment terms. A better solution is to secure financing with valuable assets to reduce the lender’s risk and improve the borrower’s terms.
Often, professional service companies fail to recognise their most valuable assets when it comes to business financing. Accounts receivable invoices are current assets, representing near-term future cash flows that are easy to liquidate. This makes invoice receivable an attractive asset class to investors and lenders. Leveraging accounts receivable to secure funding is a sound financial strategy to access a flexible, cost-effective line of credit.
Invoice Financing as an Alternative to Unsecured Loans
One of the most effective ways for professional service companies to secure the funding they need is through invoice financing, an efficient alternative to unsecured loans.
Invoice financing, also known as accounts receivable financing, allows businesses to leverage the total value of their outstanding invoices to create a revolving line of credit. The credit line allows firms to access funds immediately to cover expenses or fund growth rather than waiting for clients to pay their invoices.
When compared to unsecured loans, invoice financing offers several key advantages for professional service firms, including the following:
No Need for tangible assets: Unlike traditional bank loans, which require tangible assets for collateral, invoice financing leverages invoice values to secure the loan.
Quick Access to Capital: Current assets, such as accounts receivable, are fast and easy to value, verify and liquidate. Leading independent funders utilise fintech applications to quickly validate supporting documentation and creditworthiness of the firm’s debtors. Approval, onboarding and first funding can be completed in a few days.
Flexibility: Invoice financing features few loan covenants, minimal lender oversight, and customised terms to align payment schedules with a firm’s cash flow. This flexibility empowers firms to be agile and respond quickly to new business opportunities.
Continuous funding: This type of financing creates a revolving line of credit, allowing firms to replenish available credit as each invoice is paid. The more invoices are generated and paid; the more funds become available.
Invoice financing provides a faster, more flexible solution closely tied to the firm’s revenue. By avoiding the burden of unsecured loans, businesses can focus more on their core activities, such as delivering high-quality services to clients and expanding their market reach.
Conclusion
As the UK’s professional service sector grows and evolves, firms must find innovative solutions to support their expansion. Accessing flexible financing is essential in the face of challenges such as talent acquisition, regulatory compliance, and market competition. Invoice financing provides an attractive alternative to unsecured loans, offering businesses quick access to capital without needing tangible collateral or restrictive loan covenants. By leveraging invoice financing, professional service firms can establish financial stability, drive growth, and position themselves for long-term success in an increasingly competitive market.
Contact us today to request a free financing consultation and see what eCapital can do to help your business.
Key Takeaways
- UK business services are now the second-largest worldwide, with exports accounting for 28% of total revenue, up £3bn in just five years.
- The disruptions of the global pandemic and the economic uncertainty that followed have diminished clients’ financial health. In turn, this has caused cash flow disruptions despite increased demand for professional services.
- Disrupted cash flow weakens financial ratios and performance levels. For undercapitalised professional service companies, this results in significant disadvantages when seeking an unsecured loan.
- One of the most effective ways for professional service companies to secure the funding they need is through invoice financing, an efficient alternative to unsecured loans.
eCapital UK
eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £12 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.
