Debt becomes them – an increase in borrowing may not be a bad thing but firms must tread carefully
Law firms are upping their borrowing as the banks are happy to lend again, but is it a sign of the return of the good times?
June 05, 2014 at 07:08 PM
3 minute read
Shakespeare always intended Polonius to come across as an anachronistic old fool, but it's strange to think that the faithful counsel's most famous words might also apply to modern day commercial banking.
Of course, if the world had followed his diktat to steer clear of lending and borrowing, free market capitalism would never have seen the light of day.
However, for a long time, law firms have more or less eschewed the path taken by so many of their clients and reacted to the notion of debt in much the same way as Dracula does to a pot of aioli. That attitude has been slowly changing in recent years, and a detailed analysis of LLP filings from 2012-13, carried out by EY for Legal Week, shows that borrowing is very much in vogue among the top 50 firms.
What does this sudden – at least in the context of the slow-moving pace at which the sector traditionally changes – rush to the arms of the banks tell us about the state of health of these firms? Well, not a lot actually because, while money is money is money, the acquisition of debt can be used to hide a multitude of balance sheet sins.
It is true that many of those firms that upped borrowing in 2012-13 did so to fund growth plans that were set in place as the light at the end of the recessionary tunnel began to appear. Yet with clients taking longer and longer to pay their bills – as EY's research also shows – there is a danger that the freeing up of bank credit has come at a time when some firms are more likely to experience short-term cashflow problems.
Borrowing to open an office in Timbuktu is one thing; doing it to pay partners' quarterly drawings is quite another. And while we don't know either the tenor or terms of the loans banks are offering to firms, we can be pretty sure that they are not being marketed at pre-crisis rates.
The fact that money looks to be available again is probably, on balance, a good thing. But using relatively easy credit to cover a short-term cash shortage is a risky game. After all, robbing Peter to pay Paul has been the first step in the demise of many a business, including one or two law firms.
Polonius, bless him, may have been misguided, but law firms should bear him in mind when they next go to see their bank manager.
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