Law Firms May Soon Have More Access to Credit, but Is That the Answer?

Last Friday, the New York Times published a great article that examined the plight that most law firms have found themselves in lately, as seen through the lens of one law firm, White & Case.

As the article explained, many of law firms' current woes spring from the fact that banks have ceased to lend money as freely as they once did and are calling in previously issued loans.
A new report in The AmLaw Daily suggests that this situation may soon be coming to an end.  According to the article, JPMorgan Chase has hired the former head of Citigroup's law firm lending group to strengthen JPMorgan's own legal lending department.

The author of the post attributes the move to JPMorgan's desire to raise its rank among the top law firm lenders.  A post in Above the Law suggests that this could be good for law firms, since it will lead to the availability of more credit.

But is that really a good thing?  As both the Times and ATL point out, most law firms operate, like the Mob, on a cash-in-hand basis.  In essence, law firms borrow their operating capital from banks, expecting the money they receive from their clients to both cover the loan and provide a nice payout for the partners. 

When the loans dry up, firms do as well.  As the AmLaw article points out, the four AmLaw 200 firms that have failed - Heller Ehrman, Thelen, Thacher Proffitt & Wood, and WolfBlock - did so partially because they couldn't work out from under the debt they had incurred through their long-term lenders.

The cash-in-hand works well in times of plenty, which, for the AmLaw 200 had pretty much been all the time before the credit meltdown destroyed their financial and corporate practices.  As soon as Lehman Brothers fell, it became necessary for firms to roll back a lot of the leveraged growth they had undergone during the days of wine and roses. 

This has led to careers put on hold, a glut of unemployed law school graduates and even some tragic suicides.  Perhaps instead of continuing the cash-in-hand business model, law firms should examine other methods of running a business.

Many firms have begun to look at alternative ways the sell their services to clients, including flat fee systems, but so far none has seemed to eager to move away from the cash-in-hand model. 

Perhaps a reexamination of law firm financing could prevent a repeat of the hard lessons law firms and attorneys are learning these days.