Over the last few months we have been inundated with a number of participants in the legal profession looking for assistance with not only their personal home lending requirements but also commercial lending for their firms (normally for working capital, succession and asset purchases). It would appear that even lawyers are not immune to the tightening credit standards being experienced by the wider borrowing community. Lets hope Commissioner Hayne restructured his personal facilities prior to releasing his recent recommendations for the financial services industry!
In all seriousness however, lending to legal firms and their individual participants has always been a highly sought after and lucrative practice for the major Australian lenders. Has this changed? Well the answer is not really……
Most of the major lenders still love the industry. I mean which lender wouldn’t love an industry with very low historical default rates, stable revenue streams (often can be counter cyclical for firms with diversified revenue sources) and strong industry profitability? Doing the right thing by a firm also opens the door for a financier to look after the financial affairs of the high net worth individual equity partners behind it. If the credit appetite hasn’t changed what has?
The answer is quite simply compliance. And when lending to a legal professional I can guarantee you that every lender or banker is going to follow their lending policy to the T. This strict adherence to policy can add an additional layer of complexity, time and frustration to a legal professional looking to borrow funds.
So, when applying for finance it is important that legal firms (and their equity partners) know how to present a transaction that fits smack bang in the middle of a lenders appetite. Make the process simple for the lender and you will be amazed with the possibilities.
Did you know that a number of lenders will fund a firms working capital lock up (WIP and debtor days) without the need for property security?
Did you know that a number of lenders will fund succession or acquisition strategies to around 2 to 3 times normalised EBIT without the need for property security?
Did you know that a number of lenders will advance up to 90% against residential real estate without the need for lenders mortgage insurance for legal practitioners? This is a great option for junior partners looking to raise funds to purchase equity in a firm.
The key to negotiating these outcomes is relatively simple – get on the front foot and know how a lender is going to view the risk profile of your firm. Most lender risk assessments will focus on the following:
- The background of the firm – The number of equity partners, years in business, corporate structure, locations and number of staff.
- Revenue Analysis – Diversified revenue streams have a positive impact on risk assessment.
- WIP and Debtor Analysis – Revenue analysis feeds into the ability of the firm to convert WIP and debtors into cash. The longer it takes for a firm to convert WIP and Debtors into cash, the higher the risk profile as assessed by lenders. For example, litigation and workers comp firms are likely to have a much longer cash conversion cycle when compared to firms focussing on commercial contract law. A lender is likely to attribute a stronger risk rating to the firm specialising in commercial contracts.
- The strength and ongoing profitability of a firms trading history.
- The strength of the individuals behind the firm.
- The details (and I mean the real details) of the firms succession strategy – Unlike other industries, the sale of a legal asset (shares in a firm) is more likely to be purchased by the remaining partners in the firm. Having buy sell agreements and appropriate insurances in place is a must.
HT Capital are specialists at preparing funding requests and finance tenders for legal firms and their equity partners. We pride ourselves on the funding outcomes that are achievable through the development and execution of a detailed funding strategy.
If you are in the legal profession and want to take charge of the relationship between your firm and your key financiers, the team at HT Capital would love to hear from you. After all, the outcomes of the Royal Commission were not meant to impact the lawyers were they!
Until next time, happy lawyering!
Tim Hudson – 0458 571 773
Director and Commercial Finance Consultant
HT Capital Pty Ltd