How Can Law Firms Complement a Bank Lending Shortfall?

A recent article by alternative finance journal AltFi has highlighted what it believes to be a significant withdrawal by the largest UK banks from Small Business lending. The article cites statistics released by the Bank of England which show that net loans to small businesses by the largest UK banks fell by £536m from December 2016 to January 2017. AltFi describes this as “by far the biggest retrenchment in SME lending in the past two years, which is as far back as the data set stretches”, whilst laying the blame for the drop at the door of last year’s vote by the UK to leave the European Union.

A closer look at the Bank of England’s source data suggests that the overall trend is not quite as clear cut as AltFi suggests, and to lay the blame solely at the door of Brexit seems like a stretch. The reality is that, since the June 2016 Referendum, UK business has continued to perform and the stock market has rebounded strongly. However, what these latest Bank of England figures do reinforce quite clearly is the current sense of uncertainty in the UK’s financial sector (to which both Brexit and the appointment of President Trump have certainly contributed).

So what does this mean for law firms? High street banks are the primary funders to the legal sector and do not like uncertainty. Back in 2016 the Hazlewoods Financial Benchmarking Survey highlighted a reduction in banks’ exposure to the “higher risk” legal sector due to a sharp rise in bank debt per equity partner, and ultimately a rising number of law firms going into administration.

The root cause of administration is in many cases a lack of cash flow. With the time taken to settle bills increasing, managing cash flow is one of the biggest challenges faced by the modern law firm.

When a bank assesses the risk of a law firm (putting legal sector exposure/performance, regulatory and capital requirements to one side), they look to the balance sheet, stability, certainty, security and no surprises – they do not like change! This inevitably leads to a smaller facility being provided by the bank and less than the law firm actually needs, this is the paradox facing the law firm and a funding gap that the banks cannot bridge.

This funding gap can be filled however, and as AltFi point out, alternative funders such as VFS Legal are standing strong where bank lending is declining, with the peer-to-peer sector lending a total of £208m in January 2017.

VFS understand the challenges a law firm faces and can provide the additional funding required; aligning facilities to match actual cash flow profiles and not as a short term expensive loan. The law firm can achieve its business objectives, smooth irregularities in cash flow driven for example by uncertainty in case settlement timings,  ensure the firm is not reliant solely on their bank to be able to move forward or stay in business, and importantly increase profitability by increasing their financial muscle.

VFS Legal Funding’s products can be crucial in helping law firms achieve certainty in terms of cash flow. Whilst bank lending may be in decline, VFS is continuing to expand its portfolio to complement its clients existing bank facilities and to bridge the funding gap.

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VFS Legal offers a range of innovative funding options for Law Firms to release cash flow tied up in Costs and Disbursements. Find out more about our products here:

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