How law, accounting, engineering and consulting firms fund WIP and lock up, what lenders read without hard assets, and when to resize the overdraft.
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Professional Services · Working Capital · Lock Up
Principals of law, accounting and engineering firms often assume a firm with no plant and no stock cannot borrow for working capital. Lenders lend against the fees the firm earns and the people who guarantee them. Here are the objections principals raise, answered one by one.
Quick Answer
Law, accounting, engineering, architecture and consulting firms can borrow for working capital without hard assets, because lenders look at the fees the firm bills, how fast clients pay, and the principals who guarantee the facility. The usual shapes are a working capital loan, a line of credit or a term loan, sized to the firm's lock up rather than to whatever the overdraft limit happened to be.
Also called: practice finance for professionals, law firm working capital, WIP finance. WIP finance usually means lending against unbilled work only, while working capital finance covers the whole gap between doing the work and being paid.
How do professional services firms fund working capital?
Professional services firms fund working capital through overdrafts, lines of credit, term loans and premium funding, because the firm pays its people every fortnight while the fees for that work arrive weeks or months later. The common belief that a firm with no plant and no stock cannot borrow is wrong for most established firms: lenders lend against fees and the people who guarantee them, not against desks and laptops.
The pressure looks the same in a two-partner accounting practice and in a larger engineering or architecture consultancy. Salaries, rent, software subscriptions and insurance go out on fixed dates. Fees come in when work is billed and when clients choose to pay. The gap between the two is the firm's working capital need, and it grows as the firm takes on more work and more people.
Independent contractors who bill by the day face a smaller version of the same gap, and the commercial loan options for IT contractors cover that case. Firm owners comparing working capital with the wider business lending range can start at the Business Owners Hub. The rest of this insight works through the objections principals raise most often, one at a time.
What is lock up, and why does it squeeze a firm's cash?
Lock up (often written lockup) is work in progress plus debtors: the fees a firm has earned on paper but cannot spend yet. Work in progress, or WIP, is time recorded but not billed. Debtors are invoices sent but not paid. Add the two together and you have the cash the firm has already put up on its clients' behalf.
Lock up squeezes cash for three reasons. Growth adds new matters and new staff before the first bill goes out. Slow billing leaves work sitting unbilled at month end because principals are busy doing the work rather than invoicing it. And some clients, often the largest, pay on their own timetable whatever the invoice terms say. A firm can be profitable on its accounts and still short of cash every month, typically because lock up is moving the wrong way.
Billed
- Invoice issued, payment terms running
- Visible to a lender on the debtor ledger
- The firm can chase and collect it
- Usually turns into cash within weeks
Unbilled
- Time recorded, no invoice yet
- Value depends on write offs and client sign off
- Harder for most lenders to lend against
- Can sit for months on long matters
Billed, unbilled: the line between the two decides what a lender can see. Billed fees show up on a debtor ledger and in bank statements as clients pay. Unbilled time lives in the firm's practice management system and depends on judgement about what the client will accept. That is why lenders lean on the billed half and on the firm's track record of converting the unbilled half. The working capital loans guide covers how limits are sized in general; the table below maps each stage of lock up to the finance that usually fits.
| Stage | Cash position | Usual finance (indicative, varies by lender) |
|---|---|---|
| Work in progress, unbilled | Salaries already paid for the work, no invoice issued | Line of credit or overdraft to carry wages until billing; some specialist funders offer WIP lending, typically on tighter terms |
| Invoiced, within terms | Invoice issued, payment expected within agreed terms | Line of credit drawn as work is billed and repaid as invoices clear |
| Overdue debtors | Payment late, collection effort rising | Facility headroom; lenders typically discount aged debts when they size a limit |
| Tax and premium bills due | Lump sums on fixed dates, whatever fees have arrived | Premium funding for insurance; facility headroom planned ahead for tax instalments |
| Partner drawings | Cash paid to principals before profit is collected | Not a product question; a drawings policy set against lock up with your accountant |
A six-person accounting practice bills roughly $90,000 a month. At a typical month end it holds around $60,000 of unbilled WIP and around $110,000 of debtors, so lock up is roughly $170,000, close to two months of fees. Its overdraft limit was set at $80,000 when the practice had four people. The overdraft is not too expensive or badly run; it is simply sized to a firm that no longer exists.
Figures are illustrative only. Your own month-end WIP and debtor reports set the real number.
"We have no assets, so no lender will help." Is that true?
That is not true for most established firms: lenders assess a professional services firm on its billings, its client mix and its recurring fees, and they back that with guarantees from the principals. In our own files, the asset-light firms that get approved are usually the ones that can show fees arriving steadily across many clients, with lock up that is stable or falling rather than climbing every quarter.
Here is what lenders read instead of plant and stock:
- Billings over time. Monthly fee income in bank statements and management accounts, read through a cash flow assessment rather than only the last tax return.
- Client mix. Many clients across several sectors reads better than one client carrying the firm.
- Recurring fees. Retainers, annual compliance work and panel appointments make the next twelve months more predictable.
- The lock up trend. Whether WIP and debtors are growing faster than fees, which tells a lender whether a new limit will be repaid or simply absorbed.
- The principals. Their credit history, their property position and their willingness to sign a director's guarantee.
Many working capital facilities for firms are unsecured loans in the sense that no specific property is mortgaged, but they typically carry a general security over the firm's assets and personal guarantees from the principals. Property security, where principals have it, usually opens larger limits and sharper pricing, though that varies by lender. A firm with no property at all is not shut out; it is generally offered smaller limits that grow as the track record does.
"Can't we use client money in trust while fees come in?"
No firm can use client money in trust as working capital, because trust money belongs to the client and the rules on how it is held and paid out are set by each profession's regulator. At the time of writing, the Victorian Legal Services Board and Commissioner explains what trust money is, and that money which is not trust money must not be deposited into a trust account. Once fees are billed and paid out of trust in line with the rules, that money is the firm's. Until then, trust money is never working capital.
The rules differ by profession and by state. Law practices, conveyancers and real estate agents each have their own trust account regimes, and other firms that hold client funds face their own obligations. Treat your regulator's guidance as the source rather than any lender's or broker's summary, and take questions about a specific trust ledger to your regulator or a trust account adviser.
For working capital, the point is simple: if a cash gap could only be closed by touching client money, the firm needs a facility. Lenders sizing that facility look at the firm's own fee flows, and they look hard at client concentration, because a firm where one client pays most of the fees carries a risk that steady lock up cannot offset.
"Our drawings and tax bills are just part of running the firm." How do they affect cash?
Drawings and tax bills affect cash more than most principals expect, because they leave the firm on fixed dates whether or not lock up has turned into cash. Partner drawings are often set against expected profit, not collected profit. Provisional tax and PAYG instalments arrive on the tax office's calendar. Professional indemnity insurance usually renews as one large annual premium.
When all three land in the same quarter as a run of slow-paying clients, a profitable firm can find its overdraft sitting at the limit. In our own files, the firms that hit that wall rarely have a profit problem. They have a timing problem stacked on top of lock up.
- Drawings. Paying principals ahead of collections moves lock up onto the firm's borrowing. In company structures, loans to directors and shareholders bring their own lender questions, set out in how lenders read director loans and Division 7A.
- Tax instalments. Provisional tax and PAYG instalments are predictable, so they belong in the cash flow plan, not in an emergency draw. The working capital and EOFY tax position insight covers how lenders read a tax debt or a payment plan.
- Insurance premiums. Professional indemnity and other annual premiums can often be spread into monthly instalments through premium funding, indicative and varies by funder.
How drawings, provisional tax and instalments are set is a question for your accountant. The finance question is narrower: whether the facility has room for those bills when they arrive.
"We just use the overdraft." When does a facility sized to lock up make more sense?
A facility sized to lock up makes more sense once the overdraft is regularly at its limit, has not been reviewed as the firm grew, or is secured in a way the principals no longer want. Many firms set up a business overdraft years ago and simply kept it, so the limit reflects the firm it used to be rather than the one it is now.
- Measure lock up. Add unbilled WIP and debtors at each month end for the last several months and look at the trend, with your accountant if needed.
- Separate the base from the swings. The part of lock up that never clears suits a term loan; the part that rises and falls suits a revolving limit.
- Match the product. A business line of credit lets the firm draw as WIP builds and repay as invoices clear. A term loan suits a one-off need, such as funding a partner buy-in, where lenders also look at goodwill.
- Plan for the fixed-date bills. Tax instalments and insurance premiums go into the facility plan, or into premium funding, before they arrive.
- Review it each year. Size the facility to lock up, not to habit, and revisit it when headcount or the client base changes.
Not every firm needs to change anything. An overdraft that sits well inside its limit and is reviewed each year is doing its job. The question is whether the facility fits today's lock up. To see what a facility sized to your firm could look like, check eligibility before any conversation about limits.
Professional services firms borrow against what they earn, not what they own. Lock up is work in progress plus debtors, and it measures how much cash the firm has already put up on its clients' behalf. Trust money is never working capital, drawings and tax bills arrive on their own calendar, and an overdraft set years ago rarely fits a firm that has grown since.
Key takeaway: measure lock up first, then size the facility to lock up, not to habit.Frequently Asked Questions
A loan against work in progress is possible, but most lenders do not lend against unbilled time on its own; they lend to the firm, using billed fees, cash flow and principal guarantees. Some specialist funders offer WIP finance on tighter terms, and pricing varies by lender. More often, a line of credit carries work in progress until it is billed and collected.
Lenders assess a law or accounting firm for working capital by reading its fee income over time, its client mix, its lock up trend and the principals who will guarantee the facility. Hard assets matter less than steady billings. Many facilities are unsecured in the sense that no property is mortgaged, though guarantees are typical.
A law firm cannot use trust money for working capital, because money held in trust belongs to the client and the regulator sets how it is held and paid out. Fees become the firm's money once they are billed and paid in line with the trust rules. A gap that only trust money could fill is a sign the firm needs a facility, sized along the lines of the working capital loans guide.
Lock up in a professional services firm is the total of unbilled work in progress and unpaid debtors, the fees earned but not yet received as cash. When lock up grows faster than fees, the firm is funding its clients out of its own cash flow. Firms that rely on a business overdraft often find the limit tracks the old lock up, not the current one.
Professional indemnity insurance premiums can usually be funded through premium funding, which spreads one annual premium across monthly instalments, with terms that are indicative and vary by funder. It keeps a large fixed-date bill from landing on the overdraft. How premiums sit alongside tax bills is covered in the working capital and EOFY tax position insight.
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