How firms can get the most out of their banks

One of the places where law firm money is lost is with your bank. It is important not to be too proud to ask but, given the seemingly endless complications, many partners do not want to ask questions they think will make them appear silly. After all, banking is something we all do and there is an expectation that we should understand it.

In many partnerships the question of banking is left to one or two interested partners, or possibly the accounts department.

Is there help to be had? The short answer is yes, but it will cost you money. Consultancy exists and it may provide good return on investment, but it is better to learn the skill required and do it yourself. However, there are experts who can assess the situation. Though there might be a consultant’s charge (as a percentage of savings the consultant makes for you), there is a return, and they can also provide clues to help you keep an eye on things in the future. They often begin by checking to see that the interest calculations are correct. Unsurprisingly, errors of this nature are often in the bank’s favour.

It is also wise to consider the negotiated deal with your bank. Are facilities offered as part of the service, such as advice and consultation about debt, borrowing and overdrafts? Are the effectiveness of the day-to-day relationship and the quality of the transactions good enough?

Law firms are generally regarded as a good long-term risk, and no bank really wants to lose your business. If it doesn’t feel like that to you, something is wrong. The banks want your account because there is money to be made – they are not offering their services as a favour. But they are as much interested in your success as you are.

That is the background. From here there are some key areas to address.

There should be a meeting with the bank at least once a quarter, which is better instigated by the firm than the bank. Often the bank is thought of as the enemy, a necessary evil required to conduct business. But this should not be the case, even if the firm has cashflow problems. Avoiding the issue if it exists is the last thing you should do – banks do not want to lose their customers and will be keen to help.

Bank meeting agendas should include cashflow forecasting, special needs such as funding IT purchases, errors, the general environment, reciprocation, bank charges and overdraft facilities.

At the meeting it should be possible to look for a means of reciprocating business. It should not be beyond the wit of man to think about ideas for this, and even mentioning the words to your bank manager will ring bells – the bank will be looking for more business opportunities too and the offer to discuss it will go down well. In other words, your bank is a marketing opportunity to bring in more income, and if you don’t ask you can be sure that somebody else will. So think of it in terms of what they can bring to your firm to keep your business and that will focus the mind.

Many law firms, it seems, accept the terms they are offered without question. But the millions of pounds often transacted through the banks on behalf of clients are a goldmine of cheap and consistent money to banks, particularly when the conveyancing market is in full swing. By volume, law firms’ funds therefore contribute substantially to the money markets, and banks take a return from money that may only be with them for 24 hours. Subject to the Solicitors Accounts Rules this can be a strong negotiating point and can add valuable income or a saving to the firm. Ask your bank what they are doing with the money and see what answer you get.

In addition, there needs to be hard negotiation on services such as telegraphic transmissions. In some cases, there should be no charge for this service. It is important to know that the banks once employed large numbers of people to deal with these transactions who have since been replaced by technology – technology which is now operated by solicitors’ staff. Therefore there should be a return for the savings the banks make on these transactions. The service is usually charged by solicitors to their clients. But if some of this charge is offset by a payment to a bank ‘for use of the facility’, is this charge reasonable, when the banks are already saving money by getting the firm to do the work? What part of the bank charge can be passed on to the client? What is the reasonable and fair amount that the client should pay for this part of any transaction?

Other facilities up for negotiation include credit card payment facilities for clients, charge cards for partners, partner loan facilities, credit for capital purchases, long-term loans, rolling loans (for professional indemnity funding, for example) and commercial mortgages. For any of these facilities, the banks are making money and the aim should be that the use of them is always cheaper than going elsewhere.

So it is good to have the experience, and additionally the corporate memory, to know what used to happen and why you are where you are. In negotiating terms this is a valuable weapon. It is possible that on many occasions the negotiator on the other side will not know about the past. Today’s charging is all they know, so they naturally think of it as normal. On the other hand, some who do know may choose not to tell you.

To return to a point made earlier, this does not mean that you should think of the bank as the enemy, but in negotiating terms their need to keep you as a customer should be considered just as important as your need to keep your clients.

At this point there may be readers who say they have learned nothing so far. But I am reminded of a story that I heard about one of Delia Smith’s more recent books, which included instructions on how to boil an egg. To some, cooking instructions for something as basic as this seemed far too obvious, but research found that a sizeable number of readers did not, in fact, know how, and were glad of the knowledge that they were previously too ashamed to admit they lacked. So I am never shy about stating the obvious and negotiators should also never be shy of questioning suppliers’ rationale and terms until they fully understand them. Banks, like any other business, exist to make a profit, so make sure that you profit by the relationship too. Don’t be put off by smoke and mirrors.

Finally, looking at this in the round, to a bank a debt is an asset. There are good assets and not-so-good assets. But it is important to get your head around this simple fact. Equally, to a bank, savings are liabilities, not assets. They must have them to fund – in part at least – the borrowing requirements of their customers. So the bank needs to lend you money to make a profit. All the other services previously mentioned are additional sources of income. So, in making the deal which includes the ‘add-ons’, the margin of negotiation rests on the amount of money the bank makes by having your and your clients’ money, and what they charge you for your borrowing, against what they pay you for you placing your and your clients’ money with them. This is usually referred to as ‘the turn’, which offsets funds they hold on your behalf for clients and the money they lend to you.

My last point, therefore, is this: given current low interest rates, make sure that the money in client account is offset against any borrowing at a competitive rate.

• Email a question to Mike at AskMike@lawsociety.org.uk.

Mike Gorick is a partner at consultants SSG Legal, specialising in mergers, risk and quality standards