Better safe than sorry: UK law firms borrow almost £700m from government COVID support schemes

July 15, 2021

3 min read

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What's going on here?

Law firms across the UK have collectively borrowed a total of £694m through government COVID-19 support schemes.

What does this mean?

Firms have taken such funds from the numerous emergency loan schemes introduced at the beginning of lockdown in March 2020. £515m was borrowed from the Coronavirus Business Interruption Loan Scheme (CBILS) and £179m from the Bounce Back Loan Scheme (BBLS). A total of 6,561 loans have been provided to UK law firms across the country, with the average CBILS loan worth £319,000 and a BBLS loan worth £36,000.

 The majority of loan applications were made during May and June 2020, with a small spike in the autumn, around many practices’ renewal period for professional indemnity insurance.

Although many UK firms have taken the opportunity to borrow such sums from government schemes, indicating a swift reaction to potential disruption and revenue losses from the impacts of the pandemic, in practice, many have not touched a penny of the money borrowed.

What's the big picture effect?

The loans have allowed firms to borrow sums with an interest-free period of 12 months. Only after this is the interest rate set at 2.27%. Such loans have provided firms with the ability to focus on the work coming in without having to worry about their financial position. Helen Dickie, the managing director of MD Law in Cardiff, commented that the BBL gave her as both an employer and a law firm director, “peace of mind” with affordable repayments during the stressful coronavirus period.

The loans have largely acted as a safety net; a blanket of protection and reassurance for businesses. According to Andrew Allen from PKF Francis Clark, only 31% of firms that took out CBILS loans in 2020 expected to even use the loan. This relatively high percentage begs the question of why firms were taking out these loans in the first place. According to Allen’s LawNet survey, reasons for taking out loans included precautionary measures due to the lack of certainty over the trading outlook in the legal sector and what 2021 would bring for firms. Another reason was that loans were taken out as a form of insurance policy against the banking sector. Law firms fear the appetite banks have previously had for lending to law firms may decline if the economy is headed into a recession and there are firm failures. According to Allen, there is concern that the banking sector may not be acting “as normal” towards the legal sector in 2021/22, causing firms to look to secure funding upfront.

The fact that many firms have not even touched their government loans illustrates that they have weathered the storm pretty well during the pandemic. However, there were some initial struggles. Full-service firms saw an initial reduction in business at the beginning of the lockdown. Firms with reliance on sectors like commercial property and family law suffered initially, through a reduction in business or a delay in work partly due to third party constraints such as court closures. A reduction in business in real estate was particularly felt in the early weeks of the crisis before the stamp duty holiday effect kicking in (see our report on the effect of this here). 

Nevertheless, some sectors have seen opportunities. Residential property has witnessed an increase in business largely due to the stamp duty holiday. Private client work, particularly concerning wills and trusts, alongside employment, has witnessed a spike. On top of this, many firms have benefited financially through VAT deferrals, being able to negotiate rent holidays, and even reductions with their landlords which have combined to alleviate the financial pressures some firms have felt throughout the pandemic.

The issue is that, after offering a temporary breather, the Treasury has stressed that such loans will have to be repaid at some stage. However, the National Audit Office has warned that the government faces a potential loss of billions because as much as 60% of borrowers may default on their loan repayments. How many law firms might be included in the 60%?

Report written by Hannah Parker

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