Slater and Gordon is the latest UK law firm to secure a new funding package to boost its growth.
One of the UK’s largest consumer law firms, Manchester-headquartered Slater and Gordon has secured an improved £30 million loan agreement with Harbour Litigation Funding.
This extends a previous funding deal the two parties agreed in 2023 for a further three years.
What do law firms need funding for?
Firms’ needs for finance will vary.
You may need short term cashflow funding, medium-term finance or a loan for longer term expansion plans. You might have specific expenses in mind, for example, an acquisition of another firm, investing in new or refurbished premises, a significant tax liability to pay, indemnity insurance premiums or a practising certificate renewal. Or you might have pinch-points in each month, meaning you need liquidity that you can pay back soon afterwards. The purpose of the funding will inform the kind of finance you need.
From whom?
High street banks, so-called “second tier” lenders and specialist funders are all active in this area. You might want to borrow from your own business bankers or find a lender who specialises in lending to the legal sector. Different lenders will offer different types of lending facility, and their rates and fees will also vary significantly.
What are the main types of finance?
Term or revolving loan: a term loan means borrowing a certain amount and paying it back, with interest, over time. Revolving loans have a limit on the amount that can be borrowed, but you can borrow it and repay it as needed, a bit like an overdraft. So, term loans are often more suited to large purchases, for example, buying premises, because there is a significantinitialoutlay which can be repaid over time. Revolving loans, which can be used as needed and then repaid, are better suited if your finance needs are more short/medium term, for example, to deal with cashflow needs caused by billing cycles.
Invoice financing: sometimes known as factoring or invoice discounting. Funders will typically pay 80% to 90% of the value of an invoice you have issued and then recover the full amount from the client. Some funders will require that you notify clients that they must settle their invoice with the funder direct, rather than paying you.
Other finance options: some lenders specialise in lending in the legal sector, putting together a funding package for you, potentially combining some of the options set out above.
How can you prepare?
Have up-to-date accounts, forecasts and clear, coherent plans for the use and repayment of the funding will help speed up the process.
If your lender is likely to want guarantees or security, are you and your partners happy to give those commitments? Personal liability, via a guarantee, is a significant commitment. Discuss these issues in advance.
If you are giving security over premises, will you need a valuation? Are the premises freely chargeable? In whose name are the premises? This is especially relevant for simple partnerships, where premises may be in individual partners’ names.
What will you need to sign?
For a term or revolving loan facility, there will be a loan agreement, also referred to as a facility agreement or facility letter. For smaller loans, lenders often use their own template document, which is usually non-negotiable and is subject to standard terms. For bigger loans, some lenders may use bespoke loan agreements, drafted by their own lawyers; these can be more easily negotiated, but this often means that you pay the lender’s own legal costs.
Invoice financing isalmost alwaysdocumented on the funder’s standard documents, usually made up of a ‘front end’,setting out the commercial terms (amount, fees, term of the facility) and a set of standard conditions.
If the lender requires security from your firm, you will need to sign that. If your firm is an LLP or a limited company, security must be registered at Companies House, meaning it will be on public record. Naturally, any property security must be registered at the land registry.
If personal guarantees are being given, the relevant individuals will need to sign these. Lenders usually require that individuals giving guarantees obtain independent legal advice (ILA) in respect of their liabilities under the guarantee. ILA would need to be given by a third-party firm and there would be a cost for this.
What to look out for
All funding documents will contain commitments from you to do or not do certain things. Look out for the following:
Change of control: if certain or key partners leave the firm, or if, where the firm is a limited company, the shareholding changes significantly, the funder may call in the loan.
Fees for not using a revolving facility (usually referred to as a non-utilisation fee):generally, halfof the interest that would be charged on any outstanding facility. On term loans, there are sometimes fees for repaying a term loan early.
Default interest rate: this should be no more than 3% over the prevailing rate with clearing banks but can be higher with less well-known lenders.
Ability to change terms: some lenders include a term in their documents allowing them unilaterally to change commercial terms as they see fit.
Invoice financing will often involve controls on the invoicing process: this can include which invoices qualify for the facility and naming the lender as the payee for settling the invoice. The lender may also prohibit the issuing of credit notes.
How Clarke Willmott can help
We are experienced in advising law firms on financing and other matters. We can advise on the structure of the finance and security and the key terms as well as reviewing the legal documentation, negotiating with the funder and assisting you with complying with the conditions to funding.
Clarke Willmott is a national law firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton. For more information visit www.clarkewillmott.com
Kelvin Balmont is a partner and head of the corporate team at Clarke Willmott in Southampton.
Bethan Evans is a partner and banking and finance lawyer at Clarke Willmott in Cardiff.
