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Is an overdraft the best option for law firms?

Is an Overdraft the Best Option for Law Firms

You will often hear politicians and commentators saying how important it is that banks lend money to keep the economy going. Yet, typically law firms see borrowing as something they should avoid if possible, so why is this?

Iceberg, our leading provider of practice finance to law firms across the UK, offers opinions on this, along with how law firms could use their overdraft.

Lawyers are trained to be risk conscious. Notwithstanding this, there have been some high-profile cases of law firms over trading, usually accompanied by an over dependence on overdraft borrowing, often with disastrous results.

Rather than quantum of debt, it is more often a reliance on overdrafts, repayable on demand, that are at the root of the problem.

Used properly, overdraft facilities allow current accounts to oscillate between debit and credit balances, accommodating any imbalance in daily cash receipts and expenditure.

By contrast, when the overdraft is used to finance more than these simple movements in daily cash flow, it takes on some dangerous characteristics.

Without a repayment mechanism, there can be a tendency to allow the overdraft to grow rather than consider other more appropriate types of finance such as raising additional capital or term loans.

With a growing dependency on overdrafts to finance long term debt can come a loss of control as, in effect, decisions about who should and shouldn't get paid ultimately rests with the bank who demand repayment at any time.

On the face of it, the solution is surprisingly simple.

Rule one, use an appropriate type of finance depending upon the likely term of the debt. For example, use a 12-month fixed term loan to finance the annually recurring costs of IT licences. This will allow you to benefit from fixed interest rates and provide the stable and predictable cash flow.

Rule two, spread your borrowings beyond your bank.

Of course, things are rarely as simple as that so here are some addition points to consider.

Your bank will probably prefer to be your only source of finance because that allows them to keep control. Maintaining a second banking relationship with a high street bank can be complicated, particularly as they will often require securities making the relationship between the two banks potentially difficult.

By contrast, most firms would prefer not to borrow from smaller, independent finance providers, where the ultimate source of finance can sometimes be unclear at the outset.

Challenger banks such as Paragon Bank - Iceberg's parent - is one of the largest providers outside of the high street banks of loans to the legal profession in the UK.  Loans are repayable over a period commensurate with the term of the financed expense and because loans are unsecured, they do not affect your existing borrowings.

Iceberg understands the financial needs of the legal profession and provides short-term working capital facilities for law firms. You can find out more about Iceberg on its website.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551