Professional Services Finance Guide

​The loan term is largely influenced by the purpose of the funding, and the time frame in which benefits will be derived. ​ For example, an established accounting firm acquiring another firm may qualify for a longer loan term due to the certainty of cash flow and sustained benefits. 

Principal & Interest (P&I): Fixed repayments over the loan term, regardless of utilization. ​ Preferred for long-term stability. 

​Interest Only (IO): No principal repayment for a defined period (typically up to 3 years). Residual repayments may be higher after the IO term.  

Upon the IO term maturing, the following P&I term will be based on the total period, less the IO period. As a consequence, borrowers will usually find themselves with higher residual repayments.

For example: If your loan term was 15 years with 4 years Interest Only, the residual term is 11 years P&I.

IO may suit businesses that want to preserve cash flow. However, P&I from the outset can be desirable in many cases. The best option will come down to the opportunity cost of the “saving” and borrowers need to be aware of this consideration.

All Credit Providers have varying funding types which are packaged and presented by lenders in several ways. 

Similar to mortgages, which typically move in the same direction as the Reserve Bank cash rate, the base rates for PSI businesses are correlated to changes in these broader funding costs.

Variable rate loans are most popular with PSI borrowers as there are usually few or no restrictions. Most variable loans are flexible and allow unlimited additional repayments.

PSI interest rates are subject to a range of pricing variables. Most Credit Providers will have a "reference rate" or similar for smaller or standard loans. The interest rate that applies to each loan is a combination of the reference rate plus or minus the "Margin" applicable to that loan.

For larger facilities, the structure of interest rates will be based on a market driven "Bank Bill Rate" that is referenced to a Bank Bill Swap Rate (BBSW) or similar. An additional margin is then applied to this base rate.

For established business with strong business values and recurring income, we are seeing the lending market becoming increasingly competitive.

ICR is a measure of how easily a business can pay interest on outstanding debt.  This measure is typically more applicable to "yield assets" such as property where there is a consistent income return.  

DSR is a measure of how easily a business can pay total debt repayments on its outstanding debt.  Along with "Debt to EBITDA", this is typically a measure of capacity for PSI businesses.

Tip: DSR can be a more relevant measure of liquidity. Unlike ICR, it includes the actual cash commitment to reducing debt. Where strong amortisation is needed, the gap between DSR and ICR can be wide.

A more holistic measure of outstanding debt, against the total adjusted income of the borrower.  Divides Total Debt by the EBITDAO.  The "O" refers to adjusting for the market salary of the owner(s). Credit Providers may apply different weightings to historical, current or forecast results depending on the business.

Have a look at our example below:

The risk aversion, regulation and capital adequacy requirements imposed on major and second-tier banks meant they had varying degrees of credit appetite over the last decade.

With further consolidation and scale in the industry, we have seen opportunities for a range of other capital options, both locally and overseas, to enter the market with increased sophistication. 

With the advent of competition, we are seeing the amortisation profile of lending change. Credit providers traditionally want to see new debt amortised over say 5-10 years but this has extended materially in recent times. 

For example, for a business acquisition of a "like" business we are seeing credit provider look to extend the overall repayment basis to as much as 15 to 20 years.

As competition has returned, so has the extension of servicing.  We are seeing Debt to EBITDA Multiples out to as much as 4 times leverage in some instances.

Credit Providers generally like lending funds to PSI businesses.  Key insights in these traditional sectors include:

Size Matters
There is better lender appetite when there is reduced reliance on one key partner or owner. 

Revenue Profile
The nature of recurring revenues is a theme in PSIs. A higher level of recurring income as a portion of total revenue will build confidence in the continued ability to service debt.

Leverage
With the perception that knowledge in some PSIs is more “portable”, the risk of intellectual capital in other industries (such as legal) is less of a concern. This attitude is despite the fact that the sector centres around individuals that generate personal exertion income based on their relationships with referral partners or customers.

Other PSI business types include property and business consulting, architecture, engineering, IT and allied industries.

The revenue growth of participants in the PSI is attributed to an increased focus on providing high-value-added services. Advanced IT developments, such as data analytics and tailored software, are further accelerating growth, enabling smaller firms and consultants to compete and deliver services.  They are attracting the attention of Credit Providers looking for opportunities.