Most accounting firms borrow on a bank cash-flow line, not an asset-based line. Professional fee receivables are weak collateral on their own, because clients rarely pay a lender for work from a firm that has stopped operating, so lenders size the line on collections history and earnings, backed by the partners' guarantees. Some banks add a borrowing base limited to receivables under 90 days. The line funds payroll through the months before tax-season and extension billings are collected, and banks usually expect it paid down to zero for part of each year. Partner draws, retired-partner payments and unbilled work are what lenders study most.
- Usual structure
- Bank cash-flow line, often with a light receivables test
- What sizes it
- Collections history, earnings and the partners' guarantees
- Seasonal pattern
- Cash builds after tax deadlines and drains in the months before them
- Common condition
- An annual clean-up period with the line at zero
- Lender focus
- Partner draws, retired-partner obligations, unbilled work in progress, realization
The shape of an accounting firm's year
Salaries are level; revenue is not. A firm heavy in individual and business tax work bills most of its fees in the spring and again around the extension deadlines in the fall. Staff work long hours in the busy season on engagements that will be billed and collected weeks or months later. Then the summer and the turn of the year are quiet, with salaries, rent and software subscriptions still going out. Audit and assurance firms follow their clients' fiscal years, which usually concentrates fieldwork in the first half of the year. Firms with monthly bookkeeping, payroll or advisory clients have a steadier base underneath.
| Part of the year | Work | Billing and collection | Cash position |
|---|---|---|---|
| Start of the year | Engagement letters, organizers, early returns and year-end audits begin | Little billed; last year's balances still being collected | Drains; the line is drawn for payroll |
| Peak season | Returns and audit fieldwork at full capacity, overtime and seasonal staff | Billing accelerates; much of it is unbilled work in progress | Lowest point; line at or near its peak |
| After the spring deadline | Extensions deferred, audits wrapping up | Large billings go out and collect | Rebuilds; the line is repaid |
| Extension season | Extended business and individual returns | Second wave of billings | Strong |
| Late year | Planning and advisory work, fewer billable hours | Collections from the fall wave | Holds, then begins to drain |
The line exists to carry the firm from the early-year drain to the post-deadline collections. It is a seasonal line in everything but name, and banks structure it that way.
Why accounting receivables are weak collateral
An asset-based lender advances against receivables because it can collect them if the borrower fails. That works for a distributor's invoices: the customer received goods and owes for them regardless. It works poorly for professional fees. A client whose accountant has stopped operating needs a new firm to finish the engagement, and has every reason to dispute or withhold the old fee. Some of the receivable may also be for work the client never accepted.
So most lenders do not treat an accounting firm as a borrowing-base credit. They lend on the firm's cash flow and the strength of its partners, and use receivables as a secondary test: many banks limit the line to a portion of receivables under 90 days, or require the line to stay below a multiple of monthly collections. The distinction between the two lending models is in asset-based vs cash-flow lines.
Unbilled work in progress is weaker still. Time recorded against an engagement is not a receivable until billed, and in accounting it is often written down before billing because the engagement ran over budget. Lenders rarely count WIP at all, but they read the WIP report closely because it predicts the next few months of billings.
Realization: the number lenders ask about
Accounting firms measure how much of their standard billing value they actually bill, and how much of what they bill they actually collect. Lenders ask for both, because together they explain the gap between hours worked and cash received.
Take a firm with 1,000 of time recorded at standard rates in the busy season. If it bills 900 of it and collects 850, the other 150 was written down or written off. A firm whose write-downs grow from year to year is usually underpricing fixed-fee work or carrying clients that do not pay. Lenders treat that trend as a warning even when revenue is growing, because it means the WIP report overstates the cash coming.
A firm that can show its billing and collection realization by year, and by partner, answers the question a credit officer will otherwise work out from the aging.
Collections timing matters too. Lenders look at days sales outstanding by season: a firm that collects spring billings by early summer is a different credit from one still chasing them in the fall. Firms that bill fixed monthly fees, take card payments, or require retainers from new clients generally show better collections and need a smaller line.
Partner draws and retired partners
In a partnership or multi-owner firm, the owners take draws through the year against profits that are not finally known until the year closes. The most common way an accounting firm's line goes wrong is that draws continue at the busy-season pace through the slow months and are funded from the line. The balance never clears, the clean-up is missed, and the bank begins treating the line as a term loan it did not agree to make.
Banks protect against this with a covenant limiting distributions, a minimum liquidity requirement, or a debt service coverage test that counts partner compensation above a market salary as a distribution. Banks commonly look for coverage of at least 1.25x. The general rules on distributions are in restricted payments.
Retired-partner obligations are the other item lenders look for. Many firms pay former partners for their capital and goodwill over several years after they retire, out of current earnings. Those payments are debt-like: they are fixed, they come out of the same cash that repays the line, and they can grow sharply when several partners retire close together. A lender will ask for the partnership agreement, the schedule of payments to retired partners and the ages of current partners, and it will count the payments in coverage. Firms that have not written the obligation down clearly should do so before approaching a lender.
Acquisitions, mergers and the line
Accounting firms grow by buying books of business from retiring practitioners. These deals are commonly priced on the fees the acquired clients generate, with part of the price paid over time and adjusted for how many clients stay. A payment that depends on client retention is effectively an earnout, and it is debt-like for a lender in the same way retired-partner payments are.
A line of credit is the wrong tool to pay the purchase price itself. It is short-term money that has to clean up each year, and a practice purchase is a long-term asset. Acquisitions are usually financed with a term loan, often an SBA 7(a) loan, with the line left to carry working capital. SBA prohibits an earnout to the seller in any change of ownership it finances, so retention-based pricing has to become a fixed price before closing. Any part of that price the seller carries is a seller note, which counts toward the equity injection only if it is on full standby for the life of the SBA loan, and then for no more than half of it. Buyers should read financing a CPA firm acquisition and using a revolver in an acquisition.
After a merger, the combined firm's seasonal curve is deeper, because two firms' busy seasons coincide. The line should be resized on the combined collections history, not simply added together.
Covenants and reporting
- An annual clean-up, often a consecutive stretch in the months after the spring deadline, with the line at zero.
- Annual financial statements, and for larger lines quarterly statements with a compliance certificate.
- A receivables aging, quarterly or at renewal, and sometimes a monthly borrowing base limited to receivables under 90 days.
- A coverage or liquidity covenant, with partner compensation above a stated level treated as a distribution.
- Personal guarantees from the partners, often in proportion to ownership; see personal guarantees on a line.
- Key-person life insurance on partners who control a large share of client relationships, sometimes assigned to the bank.
The annual renewal is when a bank reviews all of this. A firm that missed its clean-up, or whose realization slipped, should expect questions and possibly a smaller line.
What trips accounting firms up
- Draws funded from the line through the slow months, so the clean-up is missed.
- Retired-partner payments left off the debt schedule. A lender will find them in the partnership agreement.
- Old receivables carried at face value. Balances from last year's season are rarely collected in full, and lenders discount them.
- One large client, often an audit client, making up a large share of fees; see customer concentration and debt.
- Cash-basis books. Many firms keep tax-basis cash books, which hide receivables, WIP and accrued salaries from a lender. Accrual statements, or at least a reconciliation, help; see cash vs accrual financials.
- A book purchase funded from working capital, leaving too little for the next busy season.
Preparing the file
From Transparent's line-of-credit checklist: an AR aging by client with days outstanding, an AP aging, the balance sheet and P&L, a year-to-date P&L through last month-end, and a debt schedule showing existing liens, with bank statements and two to three years of business tax returns where available. Accounting firms should add a monthly collections history for at least two years, the current WIP report, billing and collection realization by year, the partnership or operating agreement, and the schedule of payments to retired partners and sellers of acquired practices.
Once the documents are in, Transparent builds the lender package in a day and charges nothing before a loan closes. Law firms, which share many of these issues, are covered in lines of credit for law firms, and SBA program figures for the industry are in SBA loans for offices of certified public accountants.
Common questions
- Will a lender count my unbilled work in progress?
- Rarely. Unbilled time is not a receivable and is often written down before billing. Lenders read the WIP report to judge upcoming billings, but size the line on collections and earnings.
- What is a clean-up period and can my firm meet it?
- It is a stretch each year, set in the loan agreement, when the line must be at zero. Tax-heavy firms usually time it for the months after the spring deadline, when collections peak. Firms that fund draws from the line in the slow season are the ones that miss it.
- Can I use my line of credit to buy another practice?
- It is the wrong tool. A practice is a long-term asset and should be financed with a term loan, often an SBA 7(a) loan, leaving the line for working capital. Using the line for the purchase usually makes the clean-up impossible.
- How do lenders treat payments to retired partners?
- As debt-like obligations. They count in coverage, and a lender will want the schedule and the partnership agreement. Several retirements close together can reduce what the firm can borrow.
- Do all the partners have to guarantee the line?
- Banks usually ask for guarantees from the partners, often limited to each partner's ownership share. Larger firms with strong financial statements can sometimes negotiate limited or no guarantees; see limited vs unlimited guarantees.