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Law Firm Financing Overview
Successful law firms know that working capital can make all the difference, whether to cover operating expenses during cash flow gaps, for case development, marketing, infrastructure, or more staff.
Law firms face capital challenges unique to the legal industry. Traditional lending options present drawbacks that create pain points for law firms. The capital sources and terms do not align with how law firms earn. The consequence of this disconnect is a source of ongoing frustration for the majority of firms in the United States.
The issue is not often discussed among peer firm owners because projecting the image of strength and financial ability is critical to attracting clients and projecting strength with litigation. As a result, many small firms limit growth to when they have received payment through settlement or a strong billing cycle.
Alternatively, they fund growth on their own back, by using personal savings or a home equity line to create working capital. Sadly, delaying growth or leveraging personal retirement is all too familiar for smaller firms.
What if access to working capital was aligned with the needs of your firm to fit your timing, your portfolio, your growth vision and the reality of how revenue flows into your firm? Would it be the jet fuel to turbocharge strategic growth and propel better case outcomes for your client?
Finding the capital source that fits your firm, your timing, your growth vision and your cash flow is possible. The key is understanding the terms, requirements, and qualifications for each option and identifying the opportunity that provides the best choice for your firm and your unique needs and goals.
Here is a quick guide identifying the key features of the various options.
Firms may feel like this is the most comfortable option. Many firms have been built using self-funding through sources such as home equity lines, personal credit cards, and profits.
This approach is probably best suited to either new firms and solo practices that are just building a portfolio or firms that require one-time capital for a specific need. The drawback is that personal finances, credit or investment returns sometimes take a hit for the benefit of the business.
This option is best as a last resort or if the loan is paid back quickly. As the market changes and growth requires steady and predictable access to capital, this option becomes less attractive for long-term or regular needs.
2. Bank Loans
Banks are generally the first outside source attorneys approach for working capital. Many firms that have applied can share a story about the frustrating and time-consuming process where they waited months to be ultimately denied.
Traditional banks have long been reluctant to fund law firms for two primary reasons:
- They are looking for consistent cash flow and regular repayment terms.
- They do not have the knowledge or resources to value contingent fees for collateral.
Another way firms can qualify for a bank loan is based on a fixed asset, typically if they own their office, as banks are more comfortable with this additional collateral. The challenges are the lengthy application process, uncertain and frustrating approval process, and if a firm is approved the amount is often lower than what they sought.
3. Online Lending Platforms
In recent years new companies have cropped up pitching business loans to small businesses from $5,000 to $250,000 or more. These companies have online applications and make the application process significantly more accessible and faster than bank loans.
These loans provide capital quickly with short-term programs often ranging from 6 to 24 months. The key with these loans is that once received; repayments must be regularly made (either daily, weekly or monthly) through ACH sweep.
The repayment system works well for businesses with regular revenue but can become impossible to manage for firms engaged in litigation with irregular fee recovery schedules. This type of funding works well in other industries and can work well for law practices with very regular income.
4. Law Firm Financing
Specialty law firm financing is intended for law firms and eliminates the pain points present through other channels. Law Firm financing is unique to the legal industry because these specialized lenders can most accurately value and attribute value to a law firm’s portfolio of anticipated receivables. Further, repayment is structured to match better how the law firm receives fee revenue.
Choosing The Right Financing For Your Firm
Why does your firm need financing?
Some potential reasons to finance:
- Expansion into a new office, area of practice, & staff.
- Case expenses.
- Marketing to generate new business.
- Unexpected delays in case resolution that will make cash flow for operations challenging.
Things to Consider When Seeking Financing
What is the firm’s monthly overhead?
Include leases, payroll, all fixed and operations expenses. It is helpful to include at least minimum draw requirements for the non-salaried owners as well.
What about spending that isn’t fixed but is optional or seasonal?
Is this projected to change with new expansion plans? What will the new total be?
What was the firm’s revenue in each of the last 24 months?
Seeing this helps to illustrate the peaks and valleys and will provide essential insight into the ideal repayment terms.
Are there any unique one-time expenses anticipated?
Significant case development expenses, investment in infrastructure, a new location, a marketing investment?
What is the value of the firm’s portfolio of contingent fee cases?
Prepare a forecast of your anticipated contingent fee cases.
What does the next 8 to 12 quarters look like for case resolution and fee recovery?
Is it well spaced, clustered, uncertain?
How often do challenges arise or does the firm miss opportunity based on the need for capital?
Is it ongoing, occasional cyclical, and is there a repeated cause?
Depending on the answers to these questions the firm should have a clearer picture of the type of financing that will help to remove pain points and support the firm’s continued growth and success.
Navigating the options for financing to grow your firm can be daunting a task. If you have questions, you can reach us at 877-584-9044 and we will be happy to help you.
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