An important consideration for all businesses in planning their growth, and managing cash flow in the process, is what, if any, suitable funding can assist them.
What sources of funding are available for law firms, and how readily available are they? Andy Preece, commercial funding director at Armstrong Watson LLP, lists seven options your firm could consider.
With a large number of lenders in the marketplace, and the growth of alternative funders, there is now even more choice available.
Here are some of the areas to consider.
As with other businesses, this can be a solution to help with day-to-day cash flow requirements. The security required by lenders will vary depending upon the level of facility required, financial performance of the firm, number of partners, the legal status of the business (partnership or limited liability partnership) and the level of the security available.
This funding will be normally through more traditional banks.
2. Fixed-term practice loans
Specialist loans to the legal practice are available on either an unsecured or secured basis over a variety of periods, and can be used for:
- case acquisition
- refurbishment projects
- capital injection / release
- aged debt and block fees
- practising certificates
- PII premiums.
3. Long-term finance (mortgages)
These are available to fund the acquisition of property from both high street and alternative lenders. Partners do need to consider how lenders will look at proposals.
Equity partners are classifed as self-employed, and as such lenders will look generally to see two or three years’ worth of accounts and take an average of these. Working for a global firm can complicate matters if it takes income in foreign currency, as most high street lenders will not take this into account when calculating affordability. This is when alternative funders can come into consideration.
4. Tax loans
These allow a tax demand to be spread across more affordable monthly payments. This can assist with cash flow in the short term and offer fixed monthly payments with flexible repayment terms whilst protecting existing bank facilities. They are generally quick to set up, allowing HM Revenue & Customs to be paid on time.
5. VAT loans
These work in a very similar way to a tax loan, taking the pressure off working capital with fixed monthly payments.
6. Asset finance
This can be a useful means of financing for a variety of equipment such as IT systems, vehicles or software, and can be spread over periods of up to five years, therefore offering greater flexibility. This can be in the form of either leasing (where the item will never be owned) or hire purchase (where the goods are owned after all payments have been made).
Other benefits of hire purchase include that the expenditure is allowable against taxable profit. Leasing will generally be available with lower deposits.
In addition to the above, specific vehicle finance can be an option, with flexible solutions such as incorporating balloon payments to reduce monthly costs.
7. Factoring / invoice discounting
This is traditionally difficult for the legal profession to obtain due to the nature of the invoices being raised and when debts are payable.
Availability is now more common, although may still prove challenging.
Invoice financiers typically lend against invoices for completed work where payment is due within a 30–60-day period and will lend against these for up to 90 days from the invoice date. This can be an alternative to a more traditional overdraft and could raise a greater level of funds.
There are some specialist lenders in the alternative market that will be prepared to lend for a longer period and against less tangible outstanding debt, although this may require some additional security to support.
The above are just a few of the types of funding available in the current market. With now over 300 lenders in the alternative finance market alone, the more relevant question is probably not ‘Can I get the funding that I need?’, but rather ‘Where do I look first?’.
Other specialist lenders for the legal sector will also look at funding the following additional areas:
- costs account – allows advances to be made against costs and disbursements once cases have settled
- WIP and disbursement funding – lending to assist with long-term cash flow
- court fee finance
- personal injury funding.
The Law Society has exclusively endorsed Armstrong Watson for the provision of accountancy services to law firms. Further information can be found at: www.armstrongwatson.co.uk/legalsector
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article