What Lenders Look For in a Practice Finance Application, and How to Prepare

How lenders think about practice finance

Every lender, whether a high-street bank, a challenger bank, a specialist professions lender or an alternative funder, is ultimately asking three questions. Is the purpose sensible? Can the practice afford the repayments from its own cash flow? And if something goes wrong, what else supports the lending? The detail differs by product: acquisition finance focuses on the combined business after completion, equipment finance takes comfort from the asset, and PII premium finance looks at the practice’s ability to meet monthly instalments. The underlying logic is the same.

Professional practices have advantages here. Many lenders value recurring fee income, qualified principals and regulatory oversight. They are also alert to sector-specific risks: lock-up in law and accountancy, reliance on key individuals, regulatory events, and contract or commissioning changes in healthcare. A good application addresses both.

The documents lenders usually ask for

• Filed accounts: the most recent full-year accounts, and often the previous year for comparison. Lenders look for consistency between accounts, tax returns and bank data.
• Management accounts: recent year-to-date figures, ideally with a comparison to the same period last year. Out-of-date management information is one of the most common causes of delay.
• Business bank statements: a recent run of statements, which lenders use to verify turnover, see how the account is run and spot unarranged overdrafts or returned payments.
• Aged debtors and WIP reports: essential for law firms, accountants and other fee-earning practices, where lock-up is a key risk. See reducing lock-up.
• Forecasts: a cash flow forecast showing the new repayments, with assumptions that can be explained, particularly for acquisitions, expansions and new practices.
• Tax position: confirmation that corporation tax, VAT, PAYE and partners’ personal tax are up to date, and details of any HMRC payment plan.
• Existing borrowing: a schedule of loans, overdrafts, asset finance, premium finance and any charges or guarantees already given.
• Regulatory standing: where relevant, the practice’s position with its regulator, such as the SRA, GDC, RCVS, GPhC or CQC, and any conditions, inspections or investigations.
• People and structure: identification for directors or partners, the ownership structure and, for partnerships and LLPs, relevant agreements.

For specific purposes, lenders will want more: heads of terms and due diligence for an acquisition, supplier quotes for equipment, a schedule of works for a refurbishment, or the partnership agreement and capital call letter for partner buy-in finance.

Telling the story behind the numbers

Documents answer the what; the narrative answers the why. Credit teams read many applications, and a short, candid covering summary makes their job easier and the outcome more predictable. The most effective summaries are brief and cover:

• The request: the amount, the product and the purpose, with the total cost of the project and how the rest is funded.
• The practice: what it does, how long it has traded, its principals and fee earners or clinicians, its client or patient base and where its income comes from.
• Recent performance: the headline trend, with an honest explanation of any dip, exceptional item or change in structure.
• Repayment: how the facility will be serviced, referring to the forecast, and what happens if trading is slower than expected.
• Known issues: any adverse credit, HMRC arrangement, regulatory matter or pending dispute, with context.

Lenders respond well to management that understands its own numbers. A principal who can explain lock-up, margins, drawings policy and the effect of the new borrowing in plain terms inspires more confidence than a thick pack with no commentary. For sector-specific points, see our guides to buying a professional practice and WIP finance for law firms.

Affordability: what lenders actually test

Turnover gets attention, but lenders lend against cash flow. They generally start from profit, add back non-cash items and one-off costs that can be evidenced, and then deduct what the business must pay regardless: tax, drawings or salaries for principals, and existing debt service. What remains has to cover the new repayments with a comfortable margin, even if trading softens.

Several points commonly affect the answer:

• Drawings: in partnerships and sole practices, lenders look at what the principals take out. High drawings relative to profit reduce the capacity to service debt.
• Add-backs: lenders will usually accept genuine one-off costs if they are documented, but are sceptical of large or recurring adjustments.
• Trend: a steady or improving trend in the latest management accounts supports the case; a sharp fall needs explaining.
• Concentration: reliance on one client, one referrer, one contract or one fee earner is a risk lenders will ask about.
• Seasonality: repayment schedules that ignore known quiet periods or tax months can strain a practice that is otherwise sound.

Security and personal guarantees

Depending on the product and the lender, practice finance may be unsecured, secured on specific assets, or supported by a charge over the business. For companies and LLPs, lenders commonly ask for personal guarantees from directors or members, so that the people who control the business share the risk. In partnerships and sole practices, principals are usually personally liable in any event.

Guarantees vary in scope: some are limited to an amount, others cover all liabilities; some are joint and several between guarantors. Property may be offered or requested as additional security for larger facilities, particularly for premises finance. You should understand exactly what you are signing, and lenders may require guarantors to take independent legal advice. Our role is to explain what different lenders typically require so you can compare offers on more than price.

Regulatory standing and professional context

For regulated professions, lenders want to know that the practice’s right to operate is secure, because income depends on it. A law firm may be asked about its SRA authorisation, PII renewal and any regulatory investigations; a dental or medical practice about its CQC registration and inspection outcomes and its NHS or private contract mix; a pharmacy about its GPhC registration and contractual arrangements; a veterinary practice about its RCVS standing; a chambers or barrister about practising status. Accountancy and advisory firms may be asked about professional body membership and, where relevant, FCA permissions.

Most practices have nothing to report, and saying so clearly is enough. Where there is a matter outstanding, such as an inspection with actions to complete or a complaint under review, explaining what it is, what has been done and what the expected outcome is usually allows a lender to assess it properly rather than simply declining. For firms renewing insurance, see our PII premium finance guide.

Credit files, conduct and common reasons for decline

Lenders check the credit files of the business and usually of directors or partners. They are looking for missed payments, county court judgments, defaults, high utilisation of existing credit and a pattern of recent applications. Business conduct matters too: an account that regularly exceeds its limit, returned direct debits, or arrears with HMRC all raise questions.

It is worth checking your own personal credit files with the main credit reference agencies before applying, correcting any errors, and being ready to explain any adverse history. A historic issue that is disclosed and explained at the outset is usually far less damaging than one a lender discovers on its own.

• Management accounts that are out of date, incomplete or inconsistent with the filed accounts.
• Affordability that relies on optimistic forecasts rather than current trading.
• Unexplained falls in profit, or large adjustments without evidence.
• Arrears with HMRC or an undisclosed payment plan.
• Adverse credit for a principal that was not mentioned.
• Heavy existing borrowing, or charges already in place that the new lender cannot work around.
• Unresolved regulatory issues, or uncertainty about a key contract.
• A request that does not fit the lender approached: the wrong product, the wrong size or a sector the lender does not favour.

The last of these is the most avoidable. Lenders’ appetites differ considerably, and a decline from one lender often says more about fit than about the practice.

Why approaching many lenders yourself can hurt

It can be tempting to apply to several lenders at once and see who says yes. The difficulty is that applications may leave searches on business and personal credit files, and some lenders read a cluster of recent searches as a sign that others have declined. Each application also consumes time, often with different forms, document requests and questions, and a decline on one can need to be disclosed on the next.

A broker’s role is to do the market work first. We establish what you need, assemble the information once, identify which lenders are likely to have appetite for the profession, the purpose and the size of the request, and present the case to a small number of suitable lenders with the context already explained. Lenders receive a coherent proposal rather than raw documents, and you compare offers side by side. The British Business Bank’s finance guidance and the government’s finance and support finder are useful background on the types of finance and support available.

Timelines and sequencing

How long a finance application takes depends mainly on the product and on how ready the information is. Straightforward requests such as PII premium finance, tax funding or standard equipment finance can move relatively quickly when the pack is complete. Acquisitions, partner buy-outs, premises and larger facilities involve valuations, due diligence, legal work and sometimes regulatory steps, and take correspondingly longer.

• Start before the deadline, not at it, particularly for tax, PII renewals and completion dates.
• Ask your accountant to bring management accounts up to date before you approach lenders.
• Agree internally who is signing and guaranteeing, so that approvals are not held up at the end.
• Establish the consumer credit position early if the borrower is a sole trader, small partnership or individual partner. Finance of £25,000 or less for sole traders and small partnerships can be regulated consumer credit, and we will say at the outset if that applies. See business finance and consumer credit.

How we can help

We work with professional practices across the market, with access to 300+ lenders, to structure requests, prepare and present the case and manage the process through to completion. Read how it works, explore finance by stage such as buying a practice or growing a practice, or make an enquiry. All finance is subject to status, lender criteria and approval.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.