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Law firms turn to alternative lenders to meet tax payments

21 January 2011

Five top 100 firms have applied for loans of more than £2m to cover their tax liability ahead of the 31 January half-year deadline and a further four have requested funding of between £1m and £1.5m.

According to finance solutions provider Syscap, law firms are battling against a combination of adverse economic circumstances, including the 20 per cent VAT hike and the new 50p top rate of tax, with many finding themselves unable to make expected tax payment on account without resorting to lending.

Earlier today Syscap reported a 79 per cent increase in funding requests from law firms compared with last year, rising from £28m this time last year to nearly £50m this week.

Among the 227 firms that have approached Syscap for funding, 218 are small and medium-sized high street firms.

Recent business failures in the sector, such as the demise of Halliwells, Fox Hayes and Lees Lloyd Whiteley, have had a chilling effect on lenders, with banks less prepared to lend to law firms than they were a year ago and reducing overdrafts, according to Syscap.

Increasingly, the company says, banks are putting tighter covenant restrictions in place and asking partners to personally guarantee loans.

Philip White, chief executive of Syscap, said many law firms outside the top tier that would normally just go to their bank for extended credit facilities are finding it particularly hard. “The bank they have been with for years is no longer interested in lending at a sensible rate or they want to tack on huge arrangement fees even for small loans,” he said.

But Chris Marston, head of professional practices at Lloyds TSB, said the sudden rise in funding application to alternative lenders was possibly caused by other factors than banks’ reluctance to lend.

“We are continuing to lend but a lot of our customers are saying they don’t want to borrow anymore,” he said.

According to Marston firms in search of short-term loans continue to turn to their banks and there are other reasons why they would approach alternative lenders instead. The main one, he said, was that a number of secondary lenders were no longer active in the legal market.

Marston also suggested that HMRC’s stricter stance in respect of requests to defer tax payments under its ‘time to pay’ scheme could also be responsible for greater concern than normal at this time of year but that this was to be expected in the context of tighter control over public spending. Although he said most firms that had adequate financial planning policies would have budgeted for the expected payment on account.

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