Talks to provide a lifeline to a specialist solicitors’ lending arm of collapsed Icelandic bank Landsbanki were under way as the Gazette went to press.

Key Business Finance (KBF) chiefs were in crunch takeover talks with a number of banks to secure the company’s future. KBF used cash from Heritable Bank, a UK subsidiary of Landsbanki, to supply around 1,000 law firms with almost £200m in loans. It had to stop lending last week when Heritable – its only source of funds – was put into administration.

KBF’s managing director Nick Sanders said he was certain a deal would be struck, and that he was ‘regretting’ the effect of the troubles on KBF customers. KBF’s loans are typically used to pay for practising certificate fees, insurance premiums and tax liabilities – meaning its collapse would have dealt a blow to firms that rely on these loans to maintain cashflow.

Heritable’s problems, and their impact on KBF, stem directly from the current chaos in the economy.

On 7 October, Heritable’s owner Landsbanki collapsed and was nationalised by Iceland’s government. Heritable was forced into administration on the same day, as the British government seized control of Landsbanki’s UK assets.

KBF itself has not been declared insolvent, but its reliance on Heritable for cash meant it was forced to stop offering loans to new customers until it found another source of funds.

Sanders said KBF’s activities had always been profitable, and the company would be able to operate as normal once a deal had been struck.

Between March and May, a survey of business heads at 57 law firms found that 37% of firms expected to source ­additional funding over the course of the year, with 59% of these expecting to take out a loan.

Partnership income tax and VAT bills are due in January, and many firms use short-term loans to spread the costs of these over the year.

Story update - 16.10.08

Takeover talks have so far failed to secure a new backer for specialist legal lender Key Business Finance (KBF). Negotiations are likely to continue through this coming weekend.

Late on Wednesday KBF's managing director Nick Sanders said the company – which provides loans to one in ten law firms in the UK – was talking to ‘four or five’ candidates about a takeover. ‘We’re doing everything we possibly can,' he said. ‘We feel dreadfully caught in the middle of this.’

A spokeswoman for Ernst & Young, Heritable’s administrators, said: ‘Ernst & Young are considering a number of options. We are actively trying to sell the business and are in serious discussions with interested parties.’

KBF fell into difficulties following last week’s collapse of Heritable’s owner, Icelandic bank Landsbanki.