Law Firm Business Loans: How To Qualify and Use Funding
Revenue from case fees can take a long time to realize. Not to mention 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. Even better, suitable financing can help you grow your law firm by covering 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 business loan should be matched to your needs and financial situation. To help with that, this post will review how to identify, qualify for, and use a business loan to improve and expand your business.
How to Select the Right Law Firm Business Loan
When it comes to financing your law practice, you have several options:
1. Small Business Administration (SBA) Loans
With 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 a lot of demand so it can be tough to get approved for an SBA loan. If you’re approved, you can typically use the loan funds for all aspects of running your business.
2. Loans from Alternative Lenders
Any 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 which enables them to process and approve loans in as little as a few days in some cases.
3. Specialized Law Firm Business Financing
If you’re struggling to find a suitable financing option for your law firm, a specialized law firm lender is an option to consider. These industry-specific lenders charge significantly more than others, but their offerings are tailored to legal practices.
4. Invoice Factoring
As we alluded to earlier, law firm cash flow can be volatile due to the industry’s typical payment terms. This makes invoice factoring a great short-term financing solution because it enables you to sell your invoices in exchange for a cash advance. Since this financing relies on your invoice being paid, factoring companies don’t weigh your credit score as heavily as other lenders.
5. Traditional credit lines or business loans
If 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 line of credit, which you can draw down at any time up to a predetermined limit.
How to Qualify for a Law Firm Business Loan
For all the financing options listed above, other than invoice factoring, qualifying generally 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.
Each one of these factors impacts your ability to qualify for business loans for lawyers. To bolster your chances of qualifying, you can analyze each factor and see where you can improve the most. Other than that, it’s important to submit a complete, error-free application and respond to prospective lenders’ questions quickly.
How to Use Your Business Loan
How 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 and/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
Should You Apply for a Law Firm Business Loan?
Whether you should pursue a working capital loan depends on if you can cover and exceed the cost of the loan with the loan proceeds. In other words, if you can generate a return from your small business loan proceeds that covers your cost and compensates you for the risk involved, the loan is worthwhile.
Of course, figuring that out requires a cost-benefit analysis, which depends on specific financial information about your business. If you’ve never done a cost-benefit analysis, Investopedia provides this helpful guide to carrying one out.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.