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Emerging from recession – a vulnerable time for recovering law firms


Lean times: law firms can access government support as we come out of recession

Chris Marston, Head of Professional Practices at Lloyds TSB Commercial, a Legal Futures Associate, offers a view on financial issues for law firms as the economy recovers.

Is your glass half full or half empty? Is the economy recovering, and if so is there another dip ahead? Are we looking at a V-shaped recovery or a W-shaped one?

Whatever your view – and there are as many opinions as there are economists – it is inescapable that the period of upturn after a recession is a vulnerable one for businesses, as the increased cash demands of growth can cause pressure and occasionally failure.

John Maltby, managing director, Lloyds TSB Commercial, has commented: “The recession has weighed heavily on UK businesses and it is easy to see why talk of a recovery might bring welcome relief. But in the same way that we have encouraged firms to take action to survive the downturn, they will also need to prepare for the return to growth.

“The shape and scale of any recovery is still uncertain, but one thing is clear – those businesses already looking towards the upturn and planning how to make the most of it are the ones which will thrive. And those firms that sleepwalk towards recovery risk not just losing out, but falling into the overtrading trap.”

Capitalisation issues

For law firms, getting the basics right in areas such as lock-up management is as important as ever. Firms should also look at the availability of capital and debt to support rising business levels. Many of our customers have addressed the capitalisation issue this year, and we have seen partners and LLP members choosing to inject more cash into the business. In many cases, the monies to achieve this may have been borrowed as partner equity loans, which have the dual benefit of improving the firm’s gearing and providing tax relief for those individuals.

Support for firms and the Enterprise Finance Guarantee

The banks are keen to support firms in the recovery phase where it is clear that the business is well managed and viable. At Lloyds TSB Commercial, as at September 2009, we have seen our lending to the profession increase by 11% year-on-year. Firms seeking extra working capital should ensure that they maintain a regular and open dialogue with their bank, and they should be able to demonstrate their commitment, their planning and their monitoring skills using robust management information.

Some firms reach a point where, despite a sound business plan, there is either inadequate or no security available to support their proposals. In the past, this may have meant that banks were simply unable to assist. Government initiatives such as the Small Firms Loan Guarantee (SFLG) were not available to the legal profession as the sector was ineligible. However, the Enterprise Finance Guarantee (EFG) now exists, and solicitors are eligible for support under this government initiative. The main points of this scheme are as follows:

EFG application considerations

Lloyds TSB Commercial has been one of the most active providers of loans under EFG since its launch and has used it to assist solicitors’ firms, both in turnaround situations and also for start-up. EFG allows banks to back their judgement of the abilities of the management team even when traditional security is not available. At Lloyds TSB Commercial, around 90% of EFG applications are eligible and proceed to the offer stage, with most of these being drawn.

There are some important factors to take into account with respect to EFG:

If you have a client who could benefit from EFG support, you should advise them to talk to their bank. If their own bank is unable to assist, they should try another.

Lloyds TSB Commercial is determined to do all we can to help our solicitor customers to get through the challenges that the upturn presents them with. Our commitment to the EFG, combined with the training that our specialist relationship managers receive, is testimony to that determination. We want to do all we can to ensure that our customers receive the right advice and support.