Banks: lending policies toughened as mid-market practices suffer profit margin squeeze


Around 15% of all law firms will face a stark choice between merger and insolvency as banks adopt a tougher policy on lending, a leading accountancy firm predicted last week, while a top management consultancy reported a significant drop in profit margins for mid-market practices.



David Miles, partner at accountancy firm BDO Stoy Hayward, said high street banks had now woken up to the potential threats posed to smaller and mid-tier firms, and were sharpening their lending policies as a result.



He said: 'For the less sophisticated banks that do not have specialist practices for professional services firms, and for bank branches, the issues affecting two- to ten-partner firms are now on their radar screens. The profitability level of these firms is not at the level of larger firms that have been buoyed by mergers and acquisitions work. In the more commoditised areas, the margins are small.'



He added: 'In the past three or four months, we have been instructed by more banks to do strategic reviews of these firms. There has been an upturn in banks trying to spot problems. They are looking at their lending criteria and forcing firms to be better at forecasting their cash and profits.'



Mr Miles said this would force firms to consider their strategy in relation to the Legal Services Bill and the government's legal aid reforms. He said: 'Some firms have been scared to look forward, but bank pressure is forcing them to look at what they can do. Many five- to 20-partner firms have been operating in a way that, if they are honest, has no clear strategy. Merger is one option they will want to consider.'



Meanwhile, a report to be published by management consultancy Hildebrandt International later this month will reveal serious difficulties faced by mid-market firms. According to the research, in the past five years, 60% of firms with a £15 million to £60 million turnover have faced a squeeze on profit margins, while only 40% have improved or maintained margins. This is contrasted with the larger firms, where 65% saw an improvement in profit margins.



Consultant Giles Rubens said: 'A very high proportion of mid-market firms is suffering a decline in the margins they are making. This can be seen by the sheer number of mid-market firms that have disappeared in the past five years.



'Costs have gone up considerably, and they are facing strong downward pressure on fees. They have had to invest in IT, property, people and marketing, but have not been able to increase the rates they charge clients.'



Rachel Rothwell