Home » Legal Help » The challenge for SME law firms in the Covid-19 era | Feature

The challenge for SME law firms in the Covid-19 era | Feature

In March the government announced the grandly-titled Coronavirus Business Interruption Loan Scheme (CBILS). It is supposedly a £5m government backed loan interest free for 12 months. The stated intention behind the scheme is to make government backed loans to SME businesses to help see them through the present world crisis.

Subsequently, the government announced revisions to CBILS: (a) supposedly to address core deficiencies in its formulation; and (b) to expand the scheme to larger businesses.

Unfortunately, as things stand today, CBILS has been a dismal failure. The results speak for themselves. A relatively low percentage of SME businesses have even bothered applying, an even smaller number have been accepted, and it will be interesting to see what take-up there is from the larger businesses that are now included in the scheme. To date, barely £1.1bn has been lent. That may sound a substantial figure but in truth it is a meagre 0.3% of the total amount of money supposedly available. Contrast this with the US where their equivalent SME loan scheme (called the ‘Paycheck Protection Programme’) has been so successful it has already lent all the money available – about USD 350bn – or with Switzerland where by 6 April USD 15bn had already been lent.

The flaws in the existing CBILS scheme are legion. Banks do not want to expand their balance sheets in the present environment and so a government guarantee for only 80% of the loan disincentives them from lending. Their credit control processes are not set up to deal with the volume of applications and are further hobbled by practical problems created by Covid-19 such as, for example, staff being furloughed. From the borrowers’ perspective, we are in the midst of a crisis of indefinite duration and even after lockdown restrictions are gradually lifted it is going to take considerable time for life (and aggregate demand) in the economy to recover. Faced with a choice between hunkering down and trying to hoard cash, on the one hand, and having to risk personal assets by giving guarantees to lenders, on the other, SME businesses are understandably – and rationally – preferring to hoard cash.

One sector that has not received much attention in the media maelstrom is that of SME law firms. This is perhaps unsurprising as the fate of law firms is not normally a topic high on the list of the populace’s concerns. Nevertheless, we argue that SME law firms across the UK are exactly the kinds of businesses who deserve effective support by the government. Not only do law firms perform a vital role in ensuring the administration of justice by, for example, propping up the functioning of the underfunded criminal justice system and in enabling access to civil justice, but they also provide vital transactional services. They are a significant employer and a generator of a material proportion of the invisible earnings of the country. Many practices outside of London play a very important part in the economic ecosystem of their local towns and cities.

Furthermore, SME law firms are exactly the sorts of business most in need of support. Most SME law firms operate a partial or complete full-service model where they provide numerous service lines under one roof. Save predominantly in the restructuring and employment fields, income has collapsed as ordinary transactional activity has dramatically reduced, criminal litigation has been heavily impacted by the difficulty in holding trials (or other substantial hearings) and county courts have struggled to adapt to enable civil justice to continue effectively. Furthermore, these firms have been quietly reporting a predictable slow-down in payment of their invoices.

In response, law firms have taken a variety of sensible steps to try to meet the challenge. For example, firms have made cash calls on equity partners, announced the indefinite suspension of their drawings, drawn further on existing banking facilities and sought to cut costs by restructuring, furloughing staff and reducing expenditures.

In our view, the government’s current stance is unsustainable. It ought properly to support the legal sector. By so doing, it will support jobs and therefore aggregate demand. It will also indirectly support the civil and criminal justice systems and the local economies of towns and cities outside London. The danger in leaving law firms to fend for themselves is that some will survive, but will be gravely depleted in working capital and others will fail. The damage will take years to heal.

What we have been proposing as the solution is a sensible twofold scheme that works as well for SME law firms as it does for the rest of the SME sector. Step 1 is for the fovernment to launch an SME payment protection plan. This is essentially a speedy and simple loan. It will need to be 100% government backed to avoid any delay in lenders disbursing the money. It could be two- or three-times February payroll and carry a low annual interest rate of, say, 0.5%, be for a 12-month term and have no requirement for security. The object of this would be to get money into SMEs quickly to keep them afloat. It would buy time for step 2.

Step 2 would be a proper and reasoned overhaul of the CBILS scheme to make it work. What we propose is a loan for jobs-based scheme, similar to that operated in the US, where unsecured low interest loans are made to SMEs and they are incentivised by the scheme to maintain employment. The objective here is to support SMEs whilst also striking a fair balance between the interests of employees, businesses and the taxpayer. You can read more about it here.

Parliament is disproportionately full of former lawyers. They should understand the pressures the SME legal sector faces. Hopefully, they will listen, and act.

 

Philip Young of CYK and Alberto Thomas of Fideres


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