Top UK law firms borrowing more as lawyers struggle to get clients to cough up
The total debt at the UK’s top 50 law firms has hit £5.4bn, as the tougher economy sees firms struggle getting clients to pay their bills.
According to data shared exclusively with City PM by accountancy firm Lubbock Fine, the total debt has hit £5.4bn, up by £177m in the past year.
The data is based on an analysis of annual reports filed in the year to 30 November 2023 of the top firms.
Mark Turner, partner at Lubbock Fine, explained the reason is that law firms have been dealing with an increase in ‘lock-up’ days.
Law firms use the term ‘lock-up’ for the combination of work in progress (WIP) plus debtors days. WIP is the amount of time a lawyer has worked, while debtor days is an indication of how long it takes clients to pay fees. All law firms will have their own lockup targets set as part of their internal strategy.
Lubbock Fine research showed that the average lock-up time for the UK’s top 100 law firms has reached 124 days last year, a rise from 122 days in the previous year.
Turner pointed at the economic turmoil of recent years, adding it is “being reflected in clients taking longer to pay their lawyers”. He highlighted that “law firms are having to borrow more to make sure that doesn’t impact other areas like partner pay and investment in expansion.”
“Managing down lock-up days is a core focus for law firm management at present – it’s a problem that always rears its head during an economic slowdown. It also has knock-on effects that need to be managed. For example banks are often less keen to extend overdrafts to firms struggling with debts older than 90 days,” he added.
Another factor causing some firms to borrow more is for office moves. As Turner pointed out, “the move towards flexible working has seen an increase in law firms moving to smaller premises”.
He explained that there are “two significant new costs” with an office move which are “fitting out new offices and often an ‘overlap’ period where the firm is paying rent on both their new and old offices.”
Another element is acquisitions, during down periods in the economy, small to mid-size firms sometimes find themselves at a need to be acquired. Firms are seeing opportunities to make acquisitions of other firms, but as Turner stated, this “also played a role in the uptick in borrowing.”