Law firms’ bank debts have jumped 36% in the past year to an average of £38,000 per equity partner as firms seek to expand, according to research by a specialist accountant.
Hazlewoods, a top 40 firm which carries out the Law Society's financial benchmarking, says that many firms are increasing headcount and staff salaries as well as investing in assets such as IT as confidence improves.
However with more cash tied up in unpaid billing and work in progress, many have been forced to increase their borrowing.
Bank debts rose from an average of £28,000 to £38,000 per equity partner in the past year while non-bank debts rose from £10,000 to £17,000. Lockup among law firms now averages 140 days, the research showed.
Jon Cartwright, legal team partner at Hazlewoods, said: 'Bank debt is being driven up in part by the legal profession being a victim of its own success – workloads and billing are both on the rise, and firms are ploughing that back into their practices.
'As confidence rises, so more firms are feeling positive enough to take on more debt from their banks and make investments in staff and systems that might have been shelved years ago.'
In this climate, a lot of firms are dusting down investment plans that were put to one side during the downturn: 'Renewal of matter management software, increased marketing activity, and refurbishment of premises are all on the agenda again,' he said.
Another driver of the rise in bank debt among law firms is the pressure applied by banks to convert overdrafts to term loans in order to speed repayments by their law firm clients.
'As incomes rise in the sector, banks have seen an opportunity to get repayments started on some of this unsecured debt, and reduce their exposure to a sector that some of them still regard as being higher risk,' Cartwright said.
This article was first seen in The Law Society Gazette, The Daily Mail and The Brief on 31 May 2016.