The legal sector often grapples with many uncertainties, but one of the most basic recurring considerations a law firm must face is the how to meet the cost of Professional Indemnity (PI) Insurance premiums.
In an ideal scenario, law firms would systematically allocate a portion of each invoice settled towards building a reserve to cover insurance costs, thereby ensuring a cash-based premium payment approach. However, the reality leads the majority of law firms to seek finance to settle insurance premiums.
Insurance brokers consistently advocate for early completion of PI insurance policy submissions. Unfortunately, the tradition of disclosing premium details shortly before the renewal date does not grant law firms an ample window to secure financing, particularly if the initial funding request faces rejection.
Drawing on my background as a former banker who has transitioned to specialising in law firm finance and risk management, I emphasise that arranging finance early not only provides peace of mind but also enables firms to concentrate on their core priorities. This article underscores three pivotal advantages of arranging insurance premium financing early on and underscores the reasons behind its potential to offer significant benefits to law firms.
1. Securing Favourable Financial Terms
One of the most compelling reasons to arrange funding early is to capitalise on favourable financial terms. This tactic proves especially advantageous in environments where interest rates are on an upward trajectory. Considering the Bank of England is expected to increase interest rates once again on the 21st September 2023, by securing funding prior to the next hike in interest rates, law firms are guaranteed to save money.
2. Budgeting with Certainty
Timely arrangements of financing for PI insurance allows for a greater level of certainty associated with expense management. By securing funding earlier in the process the firm can have time to react to unforeseen circumstances. For example, a scenario might arise where existing funders decline the funding request, compelling the firm to seek costlier alternative sources of finance, or where a recent decline in financial performance dictates that funders cannot cover the entire insurance cost, necessitating the use of cash reserves or partner contributions.
"Early financing arrangement leads to greater financial predictability, enhancing cash flow management—paramount for sound financial management."
3. Arrange a pre-set funding line
While the precise premium cost remains unknown, many firms habitually postpone financing arrangements until the last minute without a clear understanding of the terms they might secure. Initiating early financing discussions yields peace of mind. A straightforward approach involves utilising the previous year's premium costs as a baseline and applying a reasonable incremental factor, say 10% to 15%. This provides a solid foundation for funders to evaluate requested sums, and subsequent adjustments to the borrowing amount can be made with confidence, knowing that financing terms are already agreed upon.
Navigating the Financing Process
For firms intending to finance their PI insurance premium, it's important to prepare the following information to finance brokers or banks as soon as feasible:
The latest finalized accounts.
Up-to-date management accounts.
Three to six months of bank statements.
In situations where current financial performance lags behind past years, providing a succinct overview of the circumstances and plans for improvement is advised. A finance broker can offer guidance on the supporting narrative. Engaging a finance broker can prove beneficial as they possess access to a diverse range of funders and can usually match individual circumstances to the most suitable funder. While upfront fees might not apply, finance brokers add a commission to the deal, a cost worth considering when selecting a trustworthy broker to foster a long-term relationship.
In conclusion, if your intention is to finance this year's PI insurance premium, the impending September 21st interest rate hike, with its potential impact on pricing and lender credit appetite, should serve as a compelling incentive to discuss financing arrangements now.
About the author
Paul McCluskey is Managing Director of Gemstone Legal an specialises in law firm finance and risk management. Paul is approved by the Law Society of England and Wales as a Lexcel assessor and consultant and understands the challenges associated with identifying and accessing the necessary finance solutions to help law firm thrive. Paul also has the unique approach as being the only finance broker that can secure funding and potentially show the firm a way to immediately improve income which helps to meet the payment of PI insurance premiums.
Web address: https://www.gemstonelegal.co.uk/lawfirmfinancing