Bank debt per equity partner rises more than a third in just one year

Growth plans, lockup issues, and pressure from lenders have resulted in a 36 per cent rise in the debts owed by law firms over the last year.

An analysis of the Law Society's LMS financial benchmarking survey - a survey of 200 firms with a combined turnover of £1bn - by Hazlewoods Chartered Accountants found that the average bank debt per equity partner has increased from £28,000 to £38,000.

Non-bank debts have also jumped from £10,000 to £17,000 per equity partner in the past year.

As workloads and billings increase, many firms are planning for growth by increasing headcount, raising staff salaries, and investing in IT and other infrastructure that may have been put off in previous years.

However, some firms might have been forced to increase their borrowing due to having more cash tied up in unpaid billing and work in progress. The average lockup among firms is now 140 days, according to Hazlewoods's survey.

Jon Cartwright, legal team partner at Hazlewoods, commented: 'While rising workloads and increased investment will be welcome across the profession, the ongoing issues many firms have with lockup - the wait to convert completed work into cash - mean that borrowings have had to rise to compensate.

'Delays in payment rose steadily following the credit crunch and, for a lot of firms, lockup of four or five months has become the norm.'

Another driver of the rise in bank debt is the pressure applied by banks to convert overdrafts to term loans to speed repayments by their law firm clients.

Hazlewoods explains that owing to regulations on capital holding requirements, banks are continuing to reduce their exposure to 'higher risk' lending.

'Banks are still understandably very keen to de-risk their balance sheets, and converting law firms' overdrafts to term loans is part of that process,' said Cartwright.

'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.'