Manage your manager

I would like to dispel some myths.

Myth No 1 '“ banks are tightening their credit policy relating to solicitors.

In reality, many banks view the legal profession as being characterised by high levels of personal integrity, and so far our experience of default and loss is low.

Myth No 2 '“ banks have insufficient capital and have no money to lend; they are lending less to solicitors and withdrawing or reducing facilities.

UK banks are very strongly capitalised and some are in fact lending more to the profession than a year ago.

Myth No 3 '“ banks are not embracing the government schemes available to support legal businesses.

The Enterprise Finance Guarantee Scheme provides a government guarantee for lending where the only barrier is the absence of adequate security. Unlike its predecessor, the Small Firms' Loan Guarantee Scheme, EFG is available to solicitors firms, and banks are using this scheme to help law firms to raise finance.

The UK banking market remains competitive and solicitors who feel that they are not receiving the support they need should shop around.

What are the factors affecting a lending decision?

Just as the law can seem mysterious to non-practitioners, the way bankers arrive at lending decisions may appear arcane. So, here's a summary of the fundamentals of lending assessment. It's worth emphasising that the overwhelming majority of business lending decisions are made at local level, but the principles remain the same if a central credit function is involved.

Customer standing and background. We consider how long the firm has been established, how well we know it and how well placed it is to face the future in terms of staff and premises, succession planning, business mix and competitive issues. We look at the track record and experience of the firm's management team and assess its ability to be effective in changing economic conditions. We consider whether management is prepared to take external advice from accountants or other advisers, and whether previous lending arrangements have been honoured.

Purpose and amount. We assess the business case for the borrowing, what contribution the firm is making and whether the borrowing structure is appropriate. We want to see a matching of maturities; for example, a loan for computer equipment with a lifespan of five years should not have a repayment period of seven years. We consider how the proposition fits with our credit policy, and take into account any regulatory issues such as those presented by the Consumer Credit Act or the Enterprise Finance Guarantee Scheme.

Financial performance. We'll need to see certified or audited accounts, and regular management information (see table) to understand the trading fortunes of the firm and the nature of lock-up. Many firms provide us with profit and loss accounts, but few offer balance sheets except at the year-end. Cashflow forecasts, budgets and new instructions data complete the picture.

Repayment capability. It's important for a business to demonstrate it can repay; that its forecasts are robust and stand up to sensitivity testing. Don't sensitise the forecasts before sending. We look at previous forecasts provided by the firm and assess how accurate those proved to be. I've heard solicitors say that it is impossible to prepare a cashflow forecast for a law firm. I disagree, and I know plenty of specialist accountants who can provide practical help to lawyers who don't have the expertise or the time to do it. Whatever your forecast says, don't forget to show that you have a Plan B!

Security and risk protection. We want to know if the firm can offer security. It won't persuade us to lend unwisely, but it may help you negotiate a better deal. We want to be sure the firm understands and has addressed the risks it faces, such as a rise in interest rate, or the death or disability of a key person. We need to know that there is an effective insurance regime and a disaster recovery plan. Many of our customers seem surprised at these questions, but if repayment depends upon the continued uninterrupted profitable trading of the business, then protection against these risks is critical. Rule 5 of the Code of Conduct covers this area, and I was surprised when delivering the Law Society's Regional Workshops that so many delegates said they had no disaster recovery plan '“ of those who did, none had reviewed it recently.

Terms and conditions. Once we have agreed to lend, the discussion turns to interest rates, fees and, where appropriate, performance covenants. Post-lending monitoring processes will be agreed and any pre-conditions explained.

Productive partnerships

As in all human relationships, there tends to be some golden rules that, if adhered to, will lead to a productive and supportive partnership. Here are my tips:

1. We don't like surprises. Tell us the good news and the bad.

2. We don't lend blind '“ we need high quality information and regular dialogue. Provide management information on time so it doesn't have to be chased. It's reasonable for you to expect your bank manager to acknowledge and comment upon the information you provide.

3. We don't want an entrepreneurial stake. It's your business and, for a lender, repayment is as good as it gets.

4. Show commitment and leadership. What's your stake? How are you demonstrating your commitment in financial, behavioural and leadership terms? How ready are you to champion new ideas and disciplines? How does your team view you?

5. Have a plan, know it and articulate it (and have another in case the first one doesn't work).

Recession survival tactics

The feedback I receive from our specialist managers around the country is encouraging in many respects. First, our observation is that, by and large, firms have acted more quickly and decisively than in the last recession '“ perhaps because those at the helm recall the cost of delaying tough decisions last time.

Also, we are seeing firms taking proactive steps to ensure they improve their position, and here is some of the 'best practice' that we are seeing.

• When restructuring, engage the whole team and treat everyone fairly. This seems obvious, but we have seen some firms reduce staff levels in a manner that is compliant with employment law, and effective in reducing the cost base, but which has left a negative impression not only upon those who have departed but also on those who remain. These firms will surely have difficulty recruiting when the economy recovers, but will also struggle to retain the staff they have.
• At a time when some departments might not be busy, some firms are running a programme of client care calls '“ these are always well received, generate goodwill and can also produce new instructions.
• We are seeing firms carry out will reviews, actively contacting clients whose wills are held. It's estimated that maybe as many as 20 per cent of the wills held by law firms have been superseded by another will held by a competitor firm, and a contact exercise can help to ensure that your firm holds the most recent version. Clients react well to the proactive approach and in many cases their circumstances have changed since the last will was drafted.
• Most law firms could be much better at referring clients internally, with fee earners tending to regard clients as their personal property rather than the firm's. There is often a reluctance to introduce colleagues to provide other services. This is wasteful and often clients may be unaware of the other services that the firm provides. Rather than seeing you as pushy salespeople, they're more likely to view you as acting in their best interests '“ particularly if an internal referral is made shortly after you have delighted them with the quality of your service. Some of our customers are taking this issue by the scruff of the neck and introducing targets for cross-selling and incentives for staff at all levels to introduce clients.

Law firm owners and managers who take the right steps now will have a business that is ready to fly when the economy recovers. They will also be better equipped to compete in the post-ABS world.

This article is based upon the content of the Law Society's Regional Workshops entitled 'Helping Solicitors during the Downturn' delivered by Lloyds TSB Commercial at six locations in May and June 2009.