Tuesday, 6 December 2011

Are Banks lending to the legal sector?

I have attended many conferences over the past month or so and have had to listen to one bank representative after another making claims of how wonderful they are when it comes to helping the legal profession.   Often presenting with a smile and twinkle in their eye I have had to sit and listen to how lending to the legal sector is up on the previous year and how they have extended overdrafts and provided loans for practices to develop.

Listening and drifting off to another world it is easy to get lost in the fluffy words and  believe how lucky we are to have banks who despite the deepening recession and meltdown in Europe, are still there to help when help is needed.

Unfortunately the reality bears no relationship to this fairyland rhetoric. Yes, banks are lending to the sector, and perhaps lending is up, but the fact is that a solicitor business is viewed no different from any other business, and unless you meet the credit criteria fixed by some faceless person stuck somewhere is a skyscraper in London, you will not be helped.  It’s as simple as that.

The truth is that banks will only lend when the exposure to bad debt is minimized with security and capital reserve requirements.  Ask yourself how many practices fit this criterion.  Moreover, the very reason for turning to the bank in the first place is that there is nothing in reserve and short term assistance is required. 

In fact banks look at solicitor practices differently, and in a way which  when compared with other businesses makes it even more difficult to satisfy the faceless men who make these decisions.  Most firms are profitable, but face cash flow problems. Apart from those who own the premises they occupy, there is normally no other assets of value in the business other than work in progress.  The problem is that banks when looking at the balance sheet refuse to attach any weight to it, even though the Inland Revenue is quick to value and tax it!  I am not sure why this is so when its no different to stock in a stock room.

So what can be done?  Very little I am afraid to say as the banks hold all of the cards and will clearly dictate the fate of many of those legal practices who are struggling to keep their heads above water.  All I can say is to forget loyalty and shop around.  Although most banks are the same, there are some that are worse than others.  The days of receiving a more favorable hearing if you have been with a bank for some time are long gone.  Loyalty is only a one way street for many of these banks.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

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