Starting law practice is a rewarding field and keeps you motivated as well especially when it makes a big difference in the lives of your clients. There is also a lot of competition with these rewards and attorneys will need law firm financing to survive and grow among the competition or even start a law firm.
The process of getting law firm financing is alike a small business loan process. You need cash for your law office before new prospects coming in, budget for recruitment, inventory, payroll, equipment, and for any expansion plans.
There are many benefits of getting law firm financing as compared to other industries. First off, you’re already in a strong position to get quick funding for your work within a high-paying field. There are also law firm based financing sources, which makes it easier to secure capital as compared to other sources.
Law Firm Financing Options
The law firm financing options are from traditional loans to term loans or alternative financing that don’t require collateral or personal guarantee in order to secure capital. Here are some of the top small business loan options for your law firm, with tips to make your loan application a success.
Small Business Administration (SBA) Loans
Small Business Administration loans are the easiest and quickest funding option for lawyers looking to start or expand their law practice. These loans are approved by the banks and are partially guaranteed by the federal government up to 85% of the loan’s total, allowing lenders to approve your loan application quickly. Most traditional lenders consider lending to small businesses a risky investment—they’re comfortable in working with businesses with a good and longstanding credit history.
The SBA 7(a) loan program is the best option for law firm financing. This loan option offers a large loan amount to fit any type of financial needs and can be used for any purpose. In addition, longer repayment terms and lower interest rates are another major benefits of the SBA 7(a) loan program. Remember, the SBA loan is highly competitive and the application process takes time, based upon how much information is required. So, if you’re in need of quick money, and can’t wait for that long period to get approval, its best to consider other funding opportunities.
SBA Loan Group is another lender that provides specific loans to law firms, with terms up to 25 years.
If you can’t wait enough to get an SBA loan, or if the time is of the essence, you should consider a regular bank loan. Bank loans are another best funding options for law firm financing with competitive terms and flexible interest rates, based on your loan size and credit history. Most banks are reluctant to approve funding to small businesses because of a proven business track record.
If your law firm is generating good revenue with lower overhead costs, you’re better positioned for bank loans than other small businesses. Meaning you can even afford to pay more in interest if you go with bank loans as compared to SBA loans, but you’ll likely get a quicker decision, being it the great option when you need cash fast.
Term loans are another funding option for law firm financing. These loans are your best bet especially when you have a poor credit history, making SBA loans and bank loans unlikely for you.
Typically the loan approval process of bank loans takes two to six weeks, which might be longer for your needs. Term loans offer quick access to cash—sometimes even within 24 hours and without any restrictions on when and how you use the money. These loans come in short term loans and medium-term loans. Keep in mind, short-term loans are expensive and usually have higher interest rates, and may have daily or weekly repayment terms based on the loan type you choose. Applying for SBA loans or bank loans should be your first choice for law firm financing, but if you’re unable to qualify, term loans can be the best option for you.
Business Lines of Credit
A business line of credit provides quick periodic access to cash—being it the most suitable law firm financing option. Instead of getting a large sum at once, a business credit line allows you to take out the money when you need it. The best thing about a credit line is that you only pay interest on the money you borrow against the total credit amount provided by the lender.
A business line of credit works similar to a business credit card. You can withdraw cash for any need within the term that the line of credit is open. In addition, you don’t hit hard with higher interest payments on the money you don’t use. A business credit line works best for established law firms that need cash to pay periodic purchases. The only downside of a credit line is the good credit score requirement along with a solid application to qualify.
Litigation funding is another unique funding option for law firms to access cash in a way that is not available to other small businesses. Few lenders like Burford Capital and Advanced Legal Capital lend money to law firms based on the projected court case wins or settlements. In this funding option, lenders offer an advance on the loan you hope to win as part of your clients’ court cases, and repay it based on the total you receive.
Financing from Personal Savings
Most practice law firms start with lawyers having a shiny diploma and some savings. Starting a law firm to support and assist you over a certain period is a long-distance race, not a sprint. Therefore, you should have enough savings in your account to cover your one year of personal living, unless you have a partner who earns enough to support your family without your help and is dedicated to doing so until your practice becomes profitable.
Many lawyers have taken a leap of faith and worked hard to succeed without personal savings, but there are many as well who have failed financially and ended up with stress and problems or both.
Loans from Loved Ones
Banks and credit unions are paying low rates on personal savings making it an attractive option for law firms to borrow money from their loved ones. If you’ve a sound business plan with successful existing practice but are strapped for cash, loans from family and friends are an attractive option. However, borrowing from your loved ones comes with its own potential problems. To many lenders, this funding option is filled with the likeliness of conflicts of interest. The informal handling of transactions in this scenario often leads to later incongruities over the terms of loan repayment. To avoid such issues, it’s better to draft an inclusive agreement of loan interest rate and repayment terms and have it reviewed by the independent counsel. Moreover, it is advisable to consult with a tax advisor before asking a loan from your family and friends, because changing market rates can have contrary tax penalties for both lender and borrower.
Local Business Incubator
A local small business incubator is relatively a new option for law firms to succeed. These are also called small business resource centers, with inexpensive services including office spaces and amenities, audiovisual services, as well as counseling, marketing, and future growth strategies. A local business incubator is a better substitute for a home office especially for a lawyer with no capital in hand.
As a litigator who acts for plaintiffs, you should know that the trial cost of a personal injury or other lawsuits could be arduous. For most startup lawyers and law firms, managing these costs is difficult. Well, the good news is there are new lending institutions that provide lawsuit financing, on a case-by-case basis, for clients or their lawyers. Many investors, from private lenders to banks and hedge funds, are keenly looking for big returns on their investment. Lawsuit financing is one of the way!
These lenders are offering pre-settlement funding with cash from $500 up to tens or even hundreds of thousands of dollars. These loans carry high-interest rates ranging from around 15% to 24 % per year—and sometimes even more. This is because of the client’s no creditworthiness and the likelihood that the plaintiff will not succeed in the suit or recovers less than the amount advanced.
There are also some lenders that offer loans as non-recourse, meaning you don’t have to repay the loan in case you do not win. If you resort to this financing option, make sure you have reviewed all the loan terms and can afford the possible consequences.
The Bottom Line
Before jumping into any kind of small business loans options for a law firm, make sure you know your needs and options. Every loan option has its own criteria, terms, and fees. Irrespective of what you choose, the goal is to understand all of your loan options. With the advancement in technology, the information is now available at the fingertips, and staying on top of the game, forecasting your budget, forthcoming cash needs, and cash flow management of your new legal practice is only need sensible planning and informed decision making.