Lenders usually structure an IT or managed services company's line as a borrowing base on billed receivables, sized for project and hardware work rather than for the recurring contracts, which are billed in advance and largely fund themselves. The need comes from paying engineers and distributors before the customer pays. Lenders advance typically 80% to 90% of eligible billed receivables, drop invoices more than 90 days past invoice and cap any one customer, commonly at 20% to 25%. Hardware not yet delivered and unbilled project time rarely count. Larger, acquisitive providers usually get the revolver inside a cash-flow facility sized on recurring earnings.
- What the line funds
- Hardware resale, projects and growth hiring, not the recurring contracts
- Advance rate
- Typically 80% to 90% of eligible billed receivables
- Usually ineligible
- Unbilled project time, undelivered hardware, invoices over 90 days
- Common complication
- A distributor's lien on the company's receivables or inventory
- Larger providers
- A revolver inside a cash-flow facility; senior lenders commonly 2x to 3.5x EBITDA
- Reporting
- Monthly borrowing base and aging; monthly or quarterly financials
Three businesses under one roof
Most IT services companies that reach a few million in revenue are running three businesses at once, and each has its own cash cycle. Lenders underwrite them separately even when the owner thinks of them as one.
| Revenue stream | How it bills and pays | What goes out first | How a lender reads it |
|---|---|---|---|
| Managed services contracts | Billed monthly, usually at the start of the month, often by automatic debit | Technician and help-desk payroll | The strongest earnings in the business, but little cash need: customers pay about when the work is done |
| Projects: migrations, deployments, cabling, security work | Milestones, or time and materials billed monthly in arrears | Weeks of engineer time before the first invoice | Billed invoices count; unbilled time does not |
| Hardware resale | Invoiced on delivery or installation, on the customer's payment terms | The equipment, bought from a distributor on the distributor's terms | Eligible once delivered and invoiced; thin margin, so the cost is most of the invoice |
| Resold software, cloud and security licenses | Monthly, or annually in advance | The vendor's charge to the reseller | Eligible like other receivables; annual prepayments create deferred revenue on the balance sheet |
| Hourly or break-fix support | Monthly in arrears | Technician time | Ordinary receivables, often small and spread across many customers |
The recurring contracts are why lenders like the sector: revenue that renews month after month is worth more to a cash-flow lender than the same revenue earned project by project. But the recurring contracts almost fund themselves. The cash squeeze comes from the other rows, and it grows as the company wins bigger projects.
The hardware squeeze, in plain numbers
Take a school district that orders equipment and installation from a provider. The provider buys the equipment for 400 and will invoice 460 once it is installed. Its distributor wants payment within the distributor's terms; the district pays on its own schedule after installation.
| Stage | Provider's cash | Eligible receivable | What the line can lend |
|---|---|---|---|
| Order placed with the distributor | Nothing yet | None | Nothing |
| Equipment received and staged | Owes 400 to the distributor | None: equipment in the warehouse is not a receivable | Nothing; staged inventory rarely counts |
| Distributor's payment due, installation still under way | Pays 400 | None | Nothing: the provider funds this from its own cash |
| Installed, accepted and invoiced | Out 400 | 460 | Between 368 and 414, at an advance of 80% to 90% |
| District pays | Receives 460, repays the line | Falls to zero | Availability resets |
The line does its job from the moment the invoice goes out, but not before. The gap between paying the distributor and invoicing the customer is where providers run short, and it widens with every large public-sector or enterprise project. Ways to close it include negotiating longer distributor terms, billing a deposit or a delivery milestone before installation, and, for large one-off orders, purchase order financing or contract financing, which lend against the order itself.
What counts in the borrowing base
Beyond the general rules in eligible vs ineligible receivables, lenders apply several that bite IT providers in particular.
- Services billed before they are delivered. An invoice dated the first of the month for that month's managed services is for work not yet done. Some lenders exclude it until the month has run; others accept it because the contract is in force. Ask which approach a lender takes before comparing advance rates.
- Public-sector customers. School districts, municipalities and agencies pay reliably but slowly, and an invoice that drifts past 90 days drops out. Federal receivables bring their own paperwork, covered in lines of credit for government contractors.
- One large client. Many providers have a single customer far bigger than the rest. The excess over the concentration cap is ineligible, which can remove a large share of the base; see concentration limit.
- Customers who are also vendors. A provider that buys from a customer, or sublets space from one, has a contra account, and lenders deduct what the provider owes that customer.
- Credits and disputed invoices. Service credits for missed response times and invoices under dispute reduce eligible receivables; a lender learns about them from credit memos in the ledger.
For most providers, the concentration cap and the treatment of billed-in-advance invoices move availability more than the headline advance rate does.
Borrowing base line or cash-flow facility?
Which kind of facility a provider gets depends mostly on its size and what it wants the money for. The two look quite different in practice.
| Smaller provider with hardware and project revenue | Acquisitive managed services platform | |
|---|---|---|
| Typical lender | A bank, or an asset-based lender if earnings are thin | A senior cash-flow lender, a unitranche lender or a bank group |
| What sizes the line | Eligible receivables, with a coverage test behind them | EBITDA, weighted toward the recurring contracts; senior lenders commonly 2x to 3.5x EBITDA across the whole facility |
| The line's role | Stand-alone working capital | A revolver beside a term loan that funds acquisitions |
| Main covenants | Debt service coverage, commonly at least 1.25x at banks | Leverage and fixed charge coverage, tested quarterly |
| Reporting | Monthly borrowing base certificate and aging | Quarterly compliance certificate; monthly financials; recurring revenue and churn reports |
A provider that buys other providers should arrange the revolver with the acquisition debt rather than draw an existing line to fund a purchase price; a line emptied on an acquisition cannot fund payroll the next month. See using a revolver in an acquisition, financing an IT services acquisition and lending on run-rate EBITDA for how lenders treat recently signed contracts.
Distributor liens and who comes first
The finding that most often surprises an IT provider's owner is on its own UCC search. Distributors and their financing arms routinely extend trade credit to resellers and file a lien to secure it. Some filings cover only the equipment the distributor supplied and the proceeds of reselling it; others are written as a lien on everything. Either way, the proceeds of resold hardware are receivables, which is exactly what a line lender wants first claim on.
A new lender will not close until it knows where it stands. Usually one of three things happens: the distributor releases its lien because its credit is paid on normal terms; it agrees to limit the lien to the equipment it financed, under a purchase money security interest; or the two creditors sign an intercreditor agreement dividing the collateral. The same question comes up for hardware provided to customers as a service on monthly contracts, which is usually financed through equipment leases whose lessors hold their own liens. A debt schedule that lists each of these, with the matching UCC filings, saves the lender from discovering them one at a time.
Covenants, reporting and what trips providers up
On a bank or asset-based line, expect a monthly borrowing base certificate with an aging by customer, monthly or quarterly financial statements, annual statements reviewed or audited by a CPA as the line grows, and a coverage covenant. Lenders also restrict other borrowing, acquisitions made without their consent, and distributions if coverage slips. The standard tests are in the covenants on a line of credit. What catches providers out:
- Recurring revenue that is not quite recurring. Lenders separate contracted monthly revenue from repeat project work that the owner counts as recurring. Show churn and contract terms honestly; a lender who finds the difference will discount the whole figure.
- Annual prepayments booked as revenue. Cash collected for a year of service is a liability until it is earned. Books that recognize it on receipt overstate earnings and understate what the company owes its customers.
- Unapplied cash in the aging. Payments received but not matched to invoices make the aging look older than it is and lower the borrowing base until they are cleaned up.
- Concentration without contracts. A large client on a month-to-month arrangement is a bigger risk than one on a multi-year agreement. Lenders read the termination clause.
- Owner-held relationships and certifications. If key vendor partnerships or customer relationships sit with the founder personally, lenders ask what happens without them.
The documents a lender asks for follow Transparent's line of credit checklist: an AR aging by customer with days outstanding, the AP aging (which shows distributor balances), the balance sheet, the P&L and a year-to-date P&L through last month-end, and a debt schedule with existing liens, plus bank statements and two to three years of business tax returns where available. For a provider, add a list of managed services contracts with monthly value and term. Transparent's book of 1,800+ lenders includes 235 that write asset-based lending and lines and 1,148 that write term and private credit, which covers both kinds of facility above.
Common questions
- Can a managed services company borrow against its monthly recurring revenue?
- Not as a borrowing base asset: future months of service are not receivables until they are billed. Recurring revenue matters instead to cash-flow lenders, who lend a multiple of EBITDA and give more weight to earnings that renew under contract.
- Does billing annual contracts in advance help or hurt?
- It helps cash, since the customer pays before the work. A lender reads the prepayment as deferred revenue, a liability, so it does not add to the borrowing base, and some lenders exclude advance invoices until the service period begins.
- Our distributor has a lien on our business. Can we still get a line?
- Usually, but the lien has to be dealt with first: released, limited to the equipment the distributor financed, or split with the new lender under an intercreditor agreement. Listing the filing up front avoids a late surprise.
- Do school and government receivables count?
- Yes, if they are within the lender's age limit. They are slow but reliable payers, so the practical risk is invoices drifting past 90 days and dropping out of the base. Federal receivables need extra paperwork before most lenders will count them.
- How large a line can an IT services company get?
- On a borrowing base, the line is limited to the advance on eligible receivables, typically 80% to 90%, whatever the commitment says. On a cash-flow facility, it depends on EBITDA and the leverage the lender will accept across all the debt.