Firms reliant on badly hit practice areas likely to need Government support
Law firms in the UK have borrowed £694 million through COVID-19 emergency loan schemes in the first 12 months since their introduction at the beginning of lockdown*.
Government-backed funding provided to law firms during the past year has included £515 million in CBILS loans and £179 million in BBLS loans. A total of 6,561 loans have been provided to UK law firms across the two schemes, with the average CBILS loan worth £319,000 and the average BBLS loan worth £36,000.
Almost 4,000 of the loan applications were made in May or June last year, with a smaller spike in September and October, which ties in with the professional indemnity insurance renewal for many practices.
Many law firms took out CBILS and BBLS loans as a precautionary measure, in the expectation that their business was going to be hit as the economy went through lockdown. While many law firms have performed well throughout the year of the pandemic, some, particularly full service firms, saw a reduction in business, especially in the early weeks of the crisis, prior to the effect of the stamp duty holiday kicking in.
Jon Cartwright, Partner, says: “The legal profession has weathered the storm far better than expected at the start of the COVID-19 crisis. The backstop funding from the Government provided much reassurance, albeit many firms have ended up not spending much or any of it.”
Some practice areas have experienced an increase in activity during the pandemic. This includes residential property, which is largely due to the Stamp Duty Land Tax holiday introduced in July 2020. Other areas include private client, particularly in relation to wills and trusts, as well as employment.
However, the increase in workload has not extended across the whole of the legal profession. Practice areas such as commercial property, and family have suffered a significant reduction (or delay) in work, partly due to third party constraints such as Court closures. As a result, firms which are reliant on these badly hit practices have been more inclined to use Government loans in order to provide extra liquidity through the lockdown.
A vast number of law firms have benefitted from VAT deferrals and for some, being able to negotiate rent holidays, and even reductions, with their landlords. Although this will have alleviated some cash flow issues in the short-term, the real test will be when these costs eventually have to be paid back.
Jon Cartwright says: “The option to borrow money easily and defer costs such as tax bills has given law firms a temporarily respite, but they will of course need to be paid back at some stage.”
*British Business Bank, year-end February 28