UK law firms “still struggling for funding” turn to leasing

Syscap reports that the UK legal profession is continuing to struggle for funding, despite the gathering pace of economic recovery in the country.

Reporting on research by Deloitte, Philip White, CEO at Syscap explained: “74% of law firms polled said that their access to bank lending did not improve in 2013, despite a strong trend of increasing revenues in the profession. The UK’s Top 100 law firms saw average revenue increases of 5.7% in the six months to September 2013.”

White added that this continued drought in bank lending, almost six years on from the credit crunch, is still forcing law firms to cut back on investment. 27% of firms said that their inability to access credit has forced them to delay investment over the last three years.

“The larger firms in the British legal profession,” he stressed, “have started to see green shoots appearing over the last six months, after some very lean years in terms of fee increases.

“The legal profession is one of a very limited number of sectors in which the UK is clearly a world leader, so it’s disappointing to see that its growth may be hindered by a lack of access to funding.

“While the skills and experience offered by the UK’s legal profession are undoubtedly world class, a lack of investment in IT systems and other hard assets can have a serious impact on how competitive it is globally. The fact that almost a third of firms are still being affected by this problem is worrying, especially given the increasing momentum of the economic recovery.”

Lending margins, arrangement fees weighing heavily on law firms

White added that almost half (48%) of law firms say that bank-lending margins on loans are too high, while an even higher proportion (52%) say that arrangement fees on bank loans are excessive.

Arrangement fees on bank loans to law firms can be as high as 1% of the overall value of the loan, making it a significant added burden.

White said: “Since the credit crunch, regulators have forced banks to hold higher levels of capital against the loans they write to businesses, and that burden is being passed on in the form of higher lending margins.

“The results of this survey show that law firms view the arrangement fees charged on these loans as a bigger problem, however. The substantial increases in these fees over recent years are not quite as easy to justify as the increases in lending margins.

He concluded: “This lack of access to lending is one of the reasons that law firms have increased their use of leasing to invest in growth. A lot of firms have found that reducing their reliance on expensive and difficult to access bank lending can make expansion a more achievable prospect.

“Access to bank lending is something that has caused even bigger problems for smaller firms than for larger firms. A lot of that is down to the changes in Conditional Fee Arrangements, the cuts to Legal Aid, and the risk the banks perceive smaller firms to represent.”