In the face of tighter lending markets, law firms are looking increasingly to their partnerships to raise capital rather than relying on other lending sources, according to this story in today’s NLJ.
Another factor weighing on capital reserves: longer client payment cycles. As clients suffer through a slowing economy, they take longer to pay their bills. “When that happens,” writes the NLJ, “the revenue gap becomes longer and law firms need more capital to meet their compensation obligations to partners and highly paid associates.”
According to the latest data provided by Citi Private Bank, law firms have reduced their borrowing in recent years. In 2000, firm liability was 19.8% of net income, compared with 14.1% in 2006. The percentage for 2007 is expected to be in line with 2006, says Dan DiPietro, client head of the law firm group at Citi Private Bank. Law firms are inherently conservative, DiPietro says, and the 2002 collapse of San Francisco’s Brobeck, Phleger & Harrison, which had some $90 million in debt, has added to their aversion to borrowing.
In addition, law firms more often are requiring incoming partners to pony up a lump-sum contribution, as opposed to a hold-back from compensation, DiPietro says. Citi has seen a “noticeable pick up” in the number of loans made to individual attorneys who need to pay their capital contribution upfront when they join a firm as a partner, he said.
Although the credit crunch has not significantly affected individual loans to partners, said Andrew Johnman, head of Barclays’ U.S. professional services team, losses in the subprime market have made the terms of commercial loans stricter, including those to law firms.