Law firms will face a ‘cash crunch’ at the end of January, but are likely to find it difficult to source finance from their banks, experts warned this week

The news came as the Solicitors Regulation Authority revealed that it wrote to the top 50 law firms last month encouraging them to contact the regulator if they are in financial trouble, following a Gazette report that five of the top-30 law firms have been put into ‘intensive care’ by banks.

Giles Murphy, head of assurance and business services at accountants Smith & Williamson, said many firms are facing a ‘pressure point’ caused by a combination of rent and tax deadlines.

He said: ‘Quarterly rent payments are traditionally due in mid-December, which is expensive for cash outflow. Meanwhile tax payments will be due on 31 January, with some firms paying 50% tax for the first time. Most firms’ cashflows will significantly decrease, which will be a pressure point.’

Murphy said some firms may need to seek bank finance, but unless firms can show they are well-run, ‘banks are quite tough in terms of renegotiating, and in some cases they are walking away,’ potentially leading some firms into administration.

Tony Williams, consultant at Jomati, said that while he does not expect larger firms to go into administration, some firms in the lower tiers ‘could go bust’.

He added: ‘A number of firms are facing a cash crunch, although whether it will be difficult rather than terminal is less clear. There had been hopes that work would pick up in the last quarter of this year, but that hasn’t happened. Firms have not got the cash headroom to restructure at the moment, because restructuring costs money, and that is a real issue. Some of them are in a real bind.’

Jeremy Black, associate partner in the professional practices group at Deloitte, added that its recent quarterly law firm survey indicated that revenues are currently ‘flat’, while firms are still facing pressure on fee rates. He said: ‘The figures are averages, so while some are doing much better, others are struggling a lot more.’

The SRA wrote to managing partners at the top-50 firms last month, explicitly alluding to an article in the Gazette of 30 September, which reported comments by Mark Jones, chairman of national firm Addleshaw Goddard, indicating that five top-30 law firms have been placed into ‘intensive care’ by banks. The SRA advised firms that it wished to ‘engage with them at an early stage if they experience a serious deterioration in their financial circumstances which might threaten their ability to continue’.