Revenue from case fees can take a long time to realize. Plus, the upfront cash needed to cover case-related expenses is often significant. That, plus the many other cash flow challenges lawyers face, can bring an otherwise successful firm to its knees. Law firm business financing can alleviate many of these challenges and help you cover payroll, rent, equipment, and other costs. However, given the unique nature of running a law firm, it’s not enough to obtain just any loan. Your law firm’s business loan should match your needs and financial situation. We’ll review how to identify, qualify for, and use a business loan to improve and expand your business in this post.
How to Select the Right Law Firm Business LoanWhen it comes to financing your law practice, you have several options:
1. Small Business Administration (SBA) LoansWith an SBA loan, the borrower works with a bank or credit union approved by the SBA to obtain a loan. The bank or credit union lends the money, and the SBA guarantees the loan. The SBA guarantee mitigates the lender’s downside risk, so the loan program is very competitively priced. Of course, the competitive price means there’s considerable demand, so getting approved for an SBA loan can be challenging. If you’re approved, you can typically use the loan funds for all aspects of running your business.
2. Loans from Alternative LendersAny non-bank or credit union lender is considered an alternative lender. These lenders offer a wide variety of loans and credit lines with more lenient eligibility criteria than traditional lenders. Plus, alternative lenders are more nimble, enabling them to process and approve loans in a few days.
3. Specialized Law Firm Business FinancingIf you’re struggling to find a suitable financing option for your law firm, a specialized law firm lender is an option. These industry-specific lenders charge significantly more than others, but they have a focused understanding of legal practices and their unique financial challenges.
4. Invoice FactoringAs we alluded to earlier, law firm cash flow can be volatile due to the industry’s typical payment terms. Due to this, invoice factoring is an excellent short-term financing solution because it enables you to sell your invoices in exchange for a cash advance. Since this financing is dependent on your customers paying their invoices, factoring companies don’t weigh your credit score as heavily as other lenders.
5. Traditional credit lines or business loansIf you have several years of profitability and excellent credit, you may consider applying for a bank loan or line of credit. While they have the strictest qualification criteria and slowest processing times, bank loans are competitively priced. Another traditional financing option is a business line of credit, which you can draw down at any time up to a predetermined limit.
How to Qualify for a Law Firm Business LoanFor all the financing options listed above, other than invoice factoring, qualifying comes down to the Five C’s of Credit:
- Character: represented by your credit history and industry reputation.
- Capacity: your debt-to-income ratio
- Capital: the value of your existing assets
- Collateral: An asset that can back the loan
- Conditions: the purpose of the loan, the amount involved, and prevailing interest rates.
How to Use Your Business LoanHow you use your term loan amount may or may not be restricted by your lender. However, generally speaking, all the service business loan options listed above allow spending on most business expenses. It’ll be up to you to find the ideal business expenses to invest your loan funds in, but here are a few ideas:
- Hire or train employees
- Invest in technology upgrades
- Improve office location or purchase real estate
- Pay for new marketing campaigns
- Cover case costs
- Startup business costs
- Existing business acquisition