From all of our recent dealings with the banks, it has been clear that things are not as they once were – and that solicitors will quickly have to accept the new commercial reality.
Lawyers have traditionally been low-risk, profitable customers for banks, and this has allowed access to funding on extremely favourable terms, often with a minimum of security.
But the world has changed almost beyond recognition in the past eighteen months:
Law firms no longer constitute such an inherently highly profitable sector, and the risk of lending to them has been increased by the move from Joint and Several Liability to LLPs
The introductions they provide to other potential customers have lost some of their value as banks’ lending appetite has been limited by the ‘credit crunch’
Client account balances – which make law firms’ accounts most attractive to the bankers – have shrunk in line with the volume of property transactions.
The balance of the relationship between solicitors and their banks has changed, and attitudes must respond. Many bankers feel that they have been viewed as sources of “permanent” capital, rather than overdrafts being in place to deal with fluctuations in the business cycle. They also suggest that access to extra capital has been sought as a way of avoiding difficult conversations with partners or clients.
What the Banks Want
In the first place, bankers want solicitors to recognise that they are involved in a relationship, and that the bank is a ‘partner’ – not a mere ‘supplier’.
The most important thing has to be communication. Bankers want to work with united, coherent and committed partnerships, and more extensive probing about the personal financial affairs of the partners has (or will soon) become a fact of life.
The bank also needs to know that it is backing a winner. Times might be tough, but this only underlines the importance of financial management. You must be able to show the bank that the firm is financially sound and in a position to honour commitments. Having a Finance Director, or financially literate partner, with good communication skills handle the relationship is crucial.
In all dealings with the bank, preparation is key – which means sending regular copies of management information, and scheduling the annual review of facilities well in advance.
What the Banks Don’t Want
Clearly, bankers don’ want to feel that they’re being taken for granted. They certainly don’t want any surprises. Keeping the bank in the loop, even if things don’t go to plan, will pay great dividends, especially if facilities do need to be extended. Finally, Bankers do not want to be regarded as providers of ‘quasi-equity’ – permanent capital in the form of overdraft.
A Healthy Relationship
The basis of a sound relationship with the bank is to have a plan and to communicate it clearly, in their language. This means detailed cash flow forecasts, based on explicit realistic assumptions, as well as the Profit and Loss accounts plus balance sheet. It also means committing to meeting the projections, and being proactive within the firm. The bank can no longer be relied on as a ‘soft option’ in place of taking tough management decisions – the firm may need to be recapitalised at least partly by the partners themselves, jobs may need to be cut in unprofitable areas, and the firm’s business model may need to be fundamentally altered. This would all be painful, but in the absence of an alternative it may also be necessary.
If the above all fails, then it may be time to look elsewhere – but expect an ‘intrusive process’ and do not assume you will get more favourable terms. In many cases, the inconvenient truth will be that the bank has a point – and working closely with them will be vital for the firm’s future prosperity.