Andy Poole, partner in accountants Armstrong Watson, lists the types of finance available to law firms. (Updated 9 March 2021)
1. Overdraft/flexible line of credit. Flexible way to manage day-to-day cashflow shortfalls, though not the best way to finance longer-term borrowing requirements.
2. Fixed term loan. Secured or unsecured borrowing over an agreed term, often up to ten years. Typically used as core financing for growing the firm or a specific purpose (eg buying out a partner’s equity, investing in new technologies or funding premises refurbishment).
3. Factoring/invoice discounting. Allows the firm to borrow against outstanding invoices – typically where payment is due within one or two months. A good tool for funding a growing case load, but law firms can find this kind of financing difficult to arrange.
4. Asset finance. Hire purchase and leasing arrangements to spread the cost of vehicles and equipment (such as computer systems). Typically covers up to 80% of asset cost.
5. Commercial mortgage. Long-term financing secured against the firm’s premises – either for premises acquisition or to release capital tied up in an existing property.
6. Soft loans/grants. Provided on favourable terms by funders interested in supporting your business. Limited availability, but some funding may be available – for example, local authority or Local Enterprise Partnership loans that encourage local employment growth.
7. Specialist loans. A variety of types of financing for particular purposes, such as short-term tax and VAT loans (to finance tax bills) and litigation or disbursement financing (often on a non-recourse basis). Typically provided by specialist lenders with legal sector expertise.
8. Partner funding. Partners can use existing savings (or personal borrowing) to finance the firm. Often the most realistic way of financing a small start-up practice.
9. Equity investment. Capital from third party investors such as business angels or strategic partners, who take a stake in the firm as either passive or active investors.
10. Bounce Back Loan Scheme (BBLS). Self-certified business loans for businesses affected by the Coronavirus pandemic. Available through the mainstream banks, with amounts of up to £50,000. The government provide the lender with a 100% guarantee for the loan amount, should the business not be able to repay. The closing date for applications was 30 November but has since been extended until 31 March 2021. (Further details including flexible repayment terms: gov.uk)
11. Coronavirus Business Interruption Loan Scheme (CBILS). Similar to the Bounce Back Loan Scheme, albeit up to a £5m cap and available from a wider variety of lenders, including mainstream banks as well as alternative lenders. Available for businesses that have been directly affected by the Coronavirus pandemic, with the funding being available for working capital (eg PII funding, wages), asset purchases, acquisitions and bridging. The closing date for applications was 30 November, but has since been extended until 31 March 2021. (Further details: gov.uk)
12. Recovery Loan Scheme. Launching on 6 April 2021, this scheme is designed to take over from BBLS and CBILS. It will offer businesses of any size continued access to loans and other types of finance up to £10 million per business (with an 80% government guarantee for the lenders). (Further details: British Busines Bank)