Government Funded Support
Many law firms have now having taken advantage of either CBILS (Coronavirus Business Interruption Loan Scheme) or the smaller Bounce Back Loan Scheme. However, the real question remains as to what the funding landscape will look like in the months after these Government Backed Schemes come to an end on March 31st.
What we do know, is that the high street banks that have muted the underwriting of bank debt are likely to become more stringent than pre the government schemes. Bank underwriters will be scrutinising affordability assessments more closely, due to most firms having taken on additional longer-term debt via the available schemes throughout the pandemic. They will also be concerned about the level of capital they have almost been forced to provide by the government. I’m fairly convinced that there is concern over exactly how straightforward the government guarantee will be to call on, when businesses invariably start to fail.
As the repayment holiday periods on these loans tick by, the start of repayments will come into sharp focus for firms who haven’t forecast effectively. We believe that there will be many who struggle with the increased fixed costs, namely PII renewals, which many, including our fellow Calico member Lockton, are predicting due to the shortage of Insurers in the market and the lack of new entrants. We expect default rates on these government-backed loans to increase, leading to high street lending subsequently tighten post CBILS.
We are seeing debtors book values rising and, as gloomy as it sounds, bad debt levels are expected to rise further in line with this trend. Firms are facing fairly sizeable Tax and VAT liabilities due to deferments made throughout 2020, however, not all firms feel confident entering into official repayment plans with HMRC, and rightly so. The reality is that these liabilities need to get paid off over a fairly short term through a ‘time to pay’ plan, an alternative to which is to consider perhaps a longer-term government support loan.
With both the Furlough scheme and the Stamp duty freeze also coming to an end, it’s expected that there will be a short term drop off in the amount of conveyancing work that solicitors have been processing over the last 12 months.
It is, however positive to see that there is already quite a bit of activity on the M&A front. The circa £1m T/O + firms & mid-tier firms are taking advantage of the government-backed funding available to acquire smaller firms and bring in the quality staff & ongoing books of businesses that often come with those deals.
Clearly, this was always going to ignite a jump in new members joining virtual law firms as well as new virtual firms entering the market.
Reviewing Finances & Understanding the Options
Above, I touched on the potential difficulties of direct bank lending post-CBILS. It’s also important to note that two of the largest alternative funding providers to the Legal sector (Aldermore & Investec) have both sadly pulled back from the market with no expected return planned. There are also a couple of smaller mid-tier lenders who have retracted from the sector, drawing some similarities with the PII market.
So, where does this leave us, and what can you do to de-risk your firm to protect against any future downturns in income, increased costs and increased debtors?
It’s clear that there will be a smaller pool of finance providers moving forward, so my first recommendation is to maximise the benefits of CBILS while being mindful of not over-borrowing. You can in fact apply for as many CBILS facilities as you wish up to a maximum of £5m total exposure.
Some providers are offering the ability to settle early without incurring the overall interest cost, and many firms are opting to use CBILS in place of future non CBILS borrowing to reduce interest costs and the need to provide security. However, this is not the case with all providers, so you’ll need to check the terms of the settlement.
Others are refinancing a CBIL (which they have transacted early on with their bank) partly to restart repayment in the interest-free period again, but primarily to switch from a loan that their primary bank may have held a debenture over, to a loan with a 3rd party provider which is totally unsecured. Do you mean to restart the interest and payment free term again??
Spreading Liabilities to Reduce Risk
On the point of debentures, I would consider trying to spread liabilities from your primary bank to reduce risk as much as you can. We have seen banks take control of a firm’s finances when they have previously provided the lion’s share of the debt, leaving members with little control and creating high levels of stress and anxiety for partners.
Whilst it might sound a bit clichéd but when it comes to debt, my experience has taught me to never have all your eggs in one basket. With the opportunity to apply for a significant amount of debt via the CBILS scheme, also consider reducing the existing debt levels held under debenture. By doing so, you instantly put your firm in a stronger position. You’ll also have the benefit of having 12 months from now where you don’t have to make any repayments; this will take the pressure off while you may be looking to restructure your operation.
Working with a trusted finance broker who has access to multiple providers and knows the CBILS market could be a useful asset to help you spread liabilities and provide insight into the best possible providers, as each has their own nuances and idiosyncrasies. This allows you to get on with your day to day business and not have to worry about organising the best possible finance for the firm.
There will be a requirement to provide a higher degree of supporting information for future funding, so getting into the good habit of forecasting and having an up to date business plan will really help you when it comes to future funding, in addition to up to date management accounts.
Securing your Firms Future
Moving forward, there will be a growing requirement for equity directors or equity partners to guarantee finance deals if the firm is trading as an LLP or Ltd entity, and no debenture exists.
Shoring up cash flow and having tight controls over what is coming in and going out will be crucial. See Cashroom Services for a robust and efficient system. Outsourcing your debt recovery work could also be a brilliant move to ensure that you are getting these debts paid more quickly and not letting them run for months on end. Like it or not, more and more clients will be putting off paying bills until they absolutely have to.
Reducing fixed costs where possible is a balancing act(,) but with many now working from home, considering downsizing or getting rid of the office entirely(,) is something that many firms (dependent on the work they are transacting) are either looking at or have already done. Virtual offices & zoom calls, while not ideal, are clear cost and time savers.
Being clear on the potential growth sectors outlined in any business plan is crucial to ensure that everyone knows what they are doing, and therefore, having regular progress reviews to monitor KPIs is also extremely important in any diversification plans.
We ourselves at Acorn are bringing in an Operation Outsourcing company to assist with our growth plans to map out our journey for the next 3 years and clearly define what needs to be done along the way to achieve our objectives.
The use of technology has proven itself and will continue to be a critical factor for many law firms in reducing costs and increasing efficiencies. There is innovative tech being developed in all areas, so keeping up to speed with what developments are happening and implementing the relevant technology into different areas of your firm at the right time and in the right way, all needs planning. Therefore, it is crucial to have a key member of the team responsible for ensuring that you stay ahead of the curve on this as, when done correctly, provides a much slicker process.
From a support staff perspective, there are efficiencies in secretarial and document preparation. Our partners, Document Direct, have been extremely successful in this over the last few years, providing ongoing support to a wide range of well established and well-respected law firms up and down the country. It is definitely worth speaking to them if you are restructuring or looking at your costs as this can be an instant cost saving.
Acorn Business Finance decided early on that we would shift our focus to providing CBILS to as many firms as we possibly could during the pandemic. The knowledge that we have gained over the last 12 months, around both the scheme and the different funders that we have been working closely with, has been invaluable.
If you have a question about any aspect of CBILS, we’d be happy to share our knowledge and hopefully get to learn more about your plans for the future.
Stuart Gibson, Managing Director at Acorn Business Finance