Are you a partner or manager of a professional practice? Although the services you offer are backed by the status and standing of the profession, business needs are just as acute and challenging as for any small or medium sized enterprise (SME).
Key amongst those challenges is finding the sources of finance to set up and keep your business running, with sufficient working capital to allow you seize opportunities for growing or improving your business when the occasion arises.
The type of funding you choose is likely to depend on the purposes to which it is to be used, the price you are prepared to pay, and the repayment terms that are involved. So, let’s examine the possibilities:
Unsecured fixed rate practice loans
- to start with probably the most flexible of all possible sources of funding – the unsecured fixed rate practice loan;
- it is flexible because repayment terms are typically relatively short-term – from just three months to up to five years – and do not therefore commit your practice to long-term repayments of borrowing which is almost certain to accumulate considerable interest charges over the years;
- typically, there is also a fixed rate of interest and repayments based on equal monthly instalments – both of which are likely to be good news for your cashflow management;
- conventional wisdom is that unsecured loans are suitable for borrowing smaller amounts of money (than, say, secured loans), to cite credit reference agency Equifax, for example – yet specialist loans to those in professional practice such as yourself might range from £3,000 to anything up to £1 million;
- unsecured fixed rate loans may be ideal for funding the purchase or lease of essential assets for your professional practice, managing your liabilities for tax and VAT by spreading payments over the whole year, funding the commissioning of new IT hardware and software or simply enhancing your current working capital;
- some professional practices may be relying upon a bank overdraft in order to meet such relatively short-term demands on their working capital;
- this is another form of unsecured borrowing;
- interest rates are likely to be variable, an open-ended facility which continues for many years may result in considerable total interest payments, and the bank may recall the facility at any time;
- just as the name suggests, this represents borrowing against the security you offer in terms of personal assets you own or those owned by your business;
- interest rates may appear cheaper than those for unsecured loans, but you are likely to be repaying a secured loan over a much longer period of time – ten or twenty years, for example – so that the total interest you have paid at the end of the borrowing term may be considerable;
- traditionally, your high street bank manager has been the first port of call for a longer-term, secured loan, but since the financial crisis of 2008, many business applicants have reported that it is considerably more difficult nowadays to arrange such banks loans;
- probably the most familiar form of secured lending is the mortgage on a property;
- in this respect, it is important to note that if the mortgage is secured against a commercial property – the premises from which you conduct your profession – the mortgage is not regulated by the Financial Conduct Authority (FCA)in the same way as residential or buy to let mortgages;
- even more pertinent are the risks associated with mortgaging your own home in order to raise the necessary capital for your business – if the fortunes of your business take a dive and you are no longer to meet the mortgage repayments, your very home may be in danger of repossession;
- unlike an unsecured loan, secured loans and mortgages take considerably longer to arrange, not least because of the need to draft legal documents relating to the assets offered as security;
- professional practices are frequently set up with the use of partners’ equity investment in the business – an injection of capital in return for a share in the profits to be made by the practice;
- by its very nature, this kind of investment is for the long haul, with partners may need to wait many years before enjoying a favourable return on that investment;
- it is possible to raise additional funding for your practice by asking partners to increase their equity ownership, of course, but this is likely to be an involved process and inevitably takes much longer than, say, an unsecured loan.
There are times when any professional practice needs to meet immediate liabilities – such as tax, VAT or even payment of professional liability insurance premiums – or to be able to respond quickly in seizing new market opportunities.
From this brief review of the available sources of funding, an unsecured fixed rate loan designed specifically for professional firms may have considerable merit.