The Sector

The UK legal sector is vast, contributing over £30 billion annually to the economy. Small and Mid-sized (SME) players make up a significant proportion of this, with over 9000 individual firms specialising in areas like conveyancing, employment law, and family law. These high-street firms are lifelines for both consumers and businesses in local communities throughout the UK, particularly during periods of economic uncertainty.

While the demand for legal services remains steady, SMEs face a unique set of financial challenges. Customer payments are often held in “lockup” - the period in which billable work has either not been invoiced or collected - and the industry in general is chronically underserved by banks and traditional lenders. This, in turn, impacts cash flow, with many small and mid-sized firms reporting financial constraints as a major drag on growth. 

The challenges stem from several factors inherent to the nature of legal work and the way firms operate.

Unpredictable Payment Cycles

One of the key characteristics of the legal industry in general is long payment cycles. Conveyancing (i.e. residential and commercial property law) can span months or even years, and the firm only gets paid after settlements or successful outcomes. For conveyancing firms, the timing of payments depends on property transactions completing - a process fraught with delays. This means firms frequently incur significant costs upfront - staff salaries, court fees, and operational expenses - without knowing when they will be reimbursed.

Lenders find this uncertainty unappealing. Without predictable revenue streams, traditional financing models view legal SMEs as high-risk borrowers, particularly for products like invoice finance where the funding is secured against accounts receivable.

Client Payment Challenges

Law firms often face delayed payments from clients, whether individuals or businesses. For corporate clients, payment terms can stretch to 90 days or more. For individual clients, affordability constraints or disputes can lead to late payments or even defaults.

This creates a ripple effect: legal firms must continue delivering services, even as unpaid invoices stack up, squeezing their cash flow and making it difficult to secure credit.

Limited Tangible Assets

Legal firms typically do not operate with significant physical assets. Their primary assets are their teams’ expertise and intellectual property - intangible and non-collateralisable in the eyes of many lenders. This is a stark contrast to sectors like manufacturing or construction, where equipment or inventory can serve as security for loans.

High operating costs

All of the issues are being exacerbated by the well-advertised "salary wars" among top-tier law firms which is rippling down to smaller firms. In their attempt to match rising salary expectations, operational budgets can quickly become strained. Firms that cannot afford salary increases may face higher staff turnover, increasing the costs associated with recruitment and onboarding.

Regulatory complexity

The legal industry is one of the most heavily regulated sectors in the UK. As in other heavily regulated industries like healthcare, this creates huge complexity for lenders. The Solicitor’s Regulation Authority, the industry regulator for the legal profession, imposes strict data privacy laws meaning that law firms are prohibited from sharing transaction and payment data that could identify clients. This is data that most invoice finance and receivables-focused lenders consider essential for underwriting loans, further exacerbating the SME funding gap within legal.

What’s at stake?

When cash flow becomes an issue, legal SMEs face tough decisions. They may have to delay hiring additional staff, postpone investments in technology (e.g. case management systems or increasingly standard legal AI) or, in the worst cases, turn down clients altogether. This not only stifles growth but also impacts the communities they serve, especially in areas where access to legal advice is already limited.

What can lenders do?

Lenders have traditionally adopted a one-size-fits-all approach, which fails to consider the unique needs of small and mid-sized law firms. However, the need for tailored solutions that help firms take control of their cash flow are more important than ever as payments become less predictable at the same time as costs skyrocket.

Specialised Funding Products:

To help alleviate the burden, lenders can offer products designed to match the cash flow cycles of law firms. For example, funding solutions tied to specific case milestones or invoice payments could help bridge gaps in revenue.

Transaction-Based Pricing:

Rather than traditional loans, where cash sits on the balance sheet accruing interest regardless of whether a firm actually uses it, funding that is targeted and tailored to specific transactions, such as payroll, court fees, technology or tax bills, can help firms manage funding costs.

Revolving facilities

Legal SMEs need flexible credit facilities that align with their cash flow patterns, with the option to spread repayments throughout the year. As repayments are made, balances can then be replenished to create a revolving facility accessible at short notice. 

How Lenkie can help

At Lenkie, we understand the unique challenges faced by legal SMEs. Our tailored financing solutions are designed to support your firm’s cash flow, allowing you to focus on what matters—your clients.

Here’s how it works:

• Flexible Drawdowns: Access funds when you need them, whether to pay staff, cover court fees, or invest in new technology.

• Repay on Your Terms: Repay over 1–12 months, matching your payment schedules.

• No Hidden Costs: With no arrangement fees or ongoing fixed costs, our facility is designed to help firms manage funding costs. You only pay for what you use, nothing more. 

Whether you’re dealing with delayed client payments, funding lengthy legal proceedings, or planning for growth, Lenkie provides the financial flexibility you need to succeed.

To find out how Lenkie can support your legal firm, contact us today at hello@lenkie.com or visit www.lenkie.com.

References:
https://www.lawsociety.org.uk/contact-or-visit-us/press-office/press-releases/legal-sector-grows-by-50-per-cent-in-the-last-decade

https://www.lawsociety.org.uk/topics/business-management/partner-content/the-struggle-for-mid-sized-firms