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Some of us have been in the profession for an awfully long time and remember the days where the relationship between a law firm and their bank was very much one sided; weighted in favour of the law firm. Lending was regularly approved in the absence of final accounts and/or cashflow statements. At the time, many law firms would feel insulted if their bank would have asked for financial information and therefore questioning their integrity and credibility.
How times have changed! Providing accounts and financial forecasts to a lending institute is a light touch with more and more lenders looking for additional securities over assets owned by the business and/or the business owners personally.
In my view, the tide started to turn back in 2010 following the pre-pack administration sale of Manchester firm, Halliwells. Unsecured creditors were valued at £191m, in which a return of less than a £1m was expected. This combined with the SRA’s new interest in financial stability instigated a change of attitude to liquidity ratios. This change evolved further with the introduction of an additional due diligence layer, often provided by retired magic circle partners or financial management experts to evaluate and interrogate the overall health and wealth of a law firm. Gone are the days where firms could supplement their income with the interest generated from holding client money, but instead we are bracing ourselves for the possibility of negative interest – paying the banks for the privilege of holding client money. There have been many predictions around the impact of the Legal Services Act 2007 but I don’t recall reading anything about a ‘reverse of power’ between a law firm and their bank.
What I would say to those firms who still have an ‘untouchable’ list; it is unwise to be giving credit based on the past. There were many small to medium size suppliers who would have provided goods or services to Halliwells who may not have had trade credit insurance to cover the money that was due to them. These suppliers would no doubt have ranged from translators, Counsel, experts, other law firms as well as software suppliers and many more. These small to medium size suppliers may not have been as financially resilient to absorb such a significant loss and subsequently closed themselves. In a pandemic this risk naturally increases as some firms flourish whilst other firms flounder.
The conundrum for a Managing Director (MD) is that you are torn between pacifying your legal team to provide them with an element of autonomy to build and maintain relationships with their clients, whilst placating your Finance Director to ensure ‘credit’ is not being freely given out to clients. Fee earners will reassure you, as the MD, that their client will pay but this doesn’t put working capital in your bank, here and now. Banks expect you to be as cautious as they are on who you give credit to! However, being too risk adverse in managing client/partnership relations can also stifle any entrepreneur decisions, so as you can see it is very much a balancing act.