Financing Professional Services

by Toby Dahm

The commercial finance industry loves certain industries. Trucking, staffing, distribution, and manufacturing have been heavily targeted. They’re easy to understand and easy to fund.

But what about companies that are a bit more difficult to understand and aren’t so black and white for lenders, like digital?

The Technological Age

digital

Let’s take a look at IT firms. Advancing technology is disrupting business at an increasingly high rate.  The migration from tangible objects (paper, film, fingerprints, sound) to intangible or digital, and the ability to move and receive all of this content immediately is creating a huge shift in resources.  Demand is shifting to digital development and trends in employment data show a strong need for technical professional services.

This is an opportunity for the commercial finance industry. The strong growth outlook for borrowers creates an environment that supports higher pricing. It’s also an opportunity to bring on high-growth clients. There are, however, risks that must be addressed. These include monthly billing cycles, absence of backup documentation, customer dependence, complex contracts, and reliance on subcontractors.

Navigating the Digital Sea

Navigating this requires courage, intelligence, and creativity. With a monthly billing cycle, lengthy payment terms, and a payroll heavy cost structure, a lender must get comfortable advancing on unbilled receivables. Without signed time sheets, a lender must use less direct methods of confirming accounts. A review of status reports, discussion with the account debtor, review of email correspondence, and keeping an eye on payment trends are some of the ways to verify the receivables. Lenders must also be aware of the dependence upon sub-contractors and monitor the status of the payables to them, particularly in light of the client’s financial performance and liquidity.  Monitoring of payroll tax payments is critical.

I used to be very uncomfortable with these companies. Their receivables looked like progress billings. Verbal confirmation of invoices was not as solid as I wanted. Having my client’s subcontractors on site at the account debtor made me queasy. Over time, I learned ways of navigating through these issues and how to get comfortable in a less tangible environment. Because of this, I have seen great results.

And for those willing to make this shift, there is great opportunity.

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About the Author

T DahmToby Dahm is the Senior Vice President at Hitachi Business Finance. To get in touch with Toby, you can contact him today at (248) 658-3208 or tdahm@hitachibusinessfinance.com.

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