You may be considering opening a law practice for the first time. You could also be looking for ways to grow your business or solve cash flow issues. No matter where you are in the process – law firm financing can help.
Law firms operate a unique business model that isn’t shared by many other businesses. For this reason, legal practices may run into difficulty securing financing from more traditional institutions.
This is where law firm financing comes in – it’s an alternative tailored to your business, designed to help you grow your practice and serve your clients better.
Learn about the ins and outs of law firm financing, along with how to find the best law firm financing solutions for your business!
1. What is law firm financing?
Law firm financing, sometimes called law firm funding, refers to the capital infusions specific to law firms and legal professionals. This type of financing is typically used in the legal field to cover litigation expenses, improve cash flow, purchase office supplies or simply grow the business.
Law firms operate very differently from other types of businesses and have unique revenue models. Law firm financing is uniquely tailored to law firms, and can fill the gaps where other, more traditional financing solutions fall short.
2. What is non-recourse capital?
Non-recourse capital, or non-recourse financing, is a type of commercial lending in which the lender only receives repayment from the profits a project or business generates. In other words, lenders can’t claim any other assets or forms of repayment from the borrower.
This is in contrast to asset-based financing, where collateral or a valuable asset is required to secure a business loan.
Most law firms operate a unique business model, especially in comparison to other types of businesses. Payment isn’t always straightforward, and oftentimes accommodation or flexibility is needed in order to secure financing.
This type of financing helps ensure that companies receive the law firm finances they need to succeed and meet their goals. Whether it’s for growth, working capital, to hire legal professionals, or more – law firm financing could help solve many of the problems law firms face.
3. What are the benefits of law firm financing?
The main benefit of law firm financing is that it accelerates business growth by providing law firms with the necessary funding to promote their business, improve cash flow, enhance client experience, and hire top legal professionals, among others.
Like all types of business loans, law firm financing can help you reach your goals and encourage growth. Take a look at some of the most popular benefits to law firm financing.
3.1. Improve growth prospects
Financing can provide the much-needed resources you need to scale your business. You use funding to invest in marketing initiatives that target new clients, upgrade software systems, hire new staff, expand your services, move into a larger location – and much more.
If you haven’t already, consider implementing one or more of the following marketing channels to improve your growth prospects.
- Pay-per-click advertising
- Search engine optimization (SEO)
- Social media ads (Youtube, Instagram, Facebook)
- Television ads
- Email marketing
- Public relations
- Content marketing (such as blog posts)
3.2. Improve cash flow
Cash flow is critical for performing the basic functions of your business. It can help cover everything from payroll to client acquisition costs to unexpected emergency expenses.
On the other hand, cash flow limitations can impede your ability to effectively manage your business on a day-to-day basis. Fortunately, financing can help in this area. By boosting your cash flow, your business will have more time to focus on what’s important.
Additionally, if you haven’t started your business yet, it can help you get funding to start a law firm and build it from the ground up.
3.3. Improve your client experience
Law firm financing can help you improve your customer experience in more than one way. On one hand, you can use financing to enhance customer-facing channels – the likes of modernizing the onboarding process or implementing a customer relationship management (CRM) software.
Funding also gives you the capability to offer your clients flexible payment options. Without having to worry about cash flow shortages, you’ll be able to accommodate alternative fee arrangements.
These can include unbundled legal services, subscription-based models, and fixed fee billing structures. Flexible payment options are one of the most important deciding factors for consumers looking for legal help. Offering more payment options can even help you secure more business.
3.4. Hire top legal professionals
The success of your law practice ultimately boils down to your legal talent. It’s critical to work with the best professionals in your industry. Whether you’re hoping to hire recent law school graduates or experienced professionals – these salaries come with a hefty cost.
Law firm financing can help you employ top professionals in the legal industry. Financing for law firms allows you to secure quality talent to improve your firm’s reputation and attract more business.
3.5. Cover expenses
Law firms face a number of unique expenses that aren’t present in other industries. This includes bar association dues (for both state and local bars), mandatory continuing legal education (MCLE) programs, malpractice coverage, malpractice premiums, litigation costs, and more.
These fees can quickly add up – which is why financing can help ensure your business plan doesn’t get pushed off track.
3.6. Office supplies
Managing a law firm effectively requires a number of supplies, such as computers, monitors, fax machines, accounting software, legal research software, and more. You’ll also need to fill out your office with furniture and décor.
And make upgrades when necessary. Financing can help provide a cushion to help you take care of all these expenses and more.
4. What are your law firm’s financing options?
There are various financing options that you can choose from for your law firm, including litigation funding, working capital loans, and business acquisition loans. The reasons behind your need for funding can help you decide which kind of law firm funding works best.
4.1. Litigation funding
Also sometimes called disbursement funding, this type of financing can help you cover any expenses incurred while defending your client. These costs can include expert witnesses, court filing fees, arbitration fees, attorney fees, and more.
4.2. Working capital
Working capital loans are a favorite among law firms and many other types of businesses. This financing kind provides funds for covering day-to-day business operations, including salaries, rent, supplies, and other overhead costs.
4.3. Business acquisition
Business acquisition loans are used to help finance or purchase another business or practice. You may not want to put in the work of building a law practice from the ground-up. Other times, you may be looking for ways to expand your firm.
In either scenario, acquiring an existing law practice can be a viable solution.
5. What are the best types of loans for law firms?
While the best types of loans for law firms will depend on the goals and need of the firm, some of the most popular ones include: term loans, business line of credit, revenue-based financing, Small Business Administration (SBA) loans, and private equity financing.
Once you’ve decided on your goals for law firm financing and you’ve pinpointed your exact needs, it’s time to consider the different types of law firm loans. Here are the main ways law firm loans can be structured.
5.1. Term loans
Term loans are what come to mind when most people envision a business loan. They essentially provide a lump sum of capital that’s repaid with regular payments over time. They can be short-term, about a year or less. Term loans can also be long-term, in some cases as long as 25 years.
Funding amounts and interest rates can vary depending on your personal and business’s financial criteria. Term loans are ideal when you know the exact cost of a particular project. They’re also a great choice when you’re looking to finance a major asset, such as real estate.
This type of loans can also be used to finance operating expenses, hire staff, acquire another business, refinance, and more.
5.2. Business lines of credit
Business lines of credit are sometimes compared to credit cards. These two financing options share a lot of similarities. In fact, the main difference is that lines of credit feature higher funding amounts and lower interest rates.
Business lines of credit are some of the most flexible forms of financing on the market. You’ll be granted a credit line and a set limit. You’ll be able to withdraw funds from your credit line as needs arise and you’ll only have to pay interest on what you borrow. Plus, as you pay down your balance, funds will become available again.
Business lines of credit are ideal when you don’t know the exact costs of a certain project or if you need to cover ongoing operational expenses. They can also be used to fund almost any type of business expenses, like hiring staff, advertising, legal expenses, and more.
5.3. Revenue-based financing
Revenue-based financing for law firms is when you pledge a percentage of your future income in return for a loan. You’ll pay back your debt, plus interest, via a predetermined percentage of the income you bring in for a set period of time.
In other words, your payments will be based on your business’s monthly cash flow, instead of fixed monthly payments. This allows for more flexibility and can be easier on your finances if you’re in a slow period.
This type of funding is similar to merchant cash advances (MCA). In fact, the two terms can oftentimes be used interchangeably. The only downside to this funding type is that they tend to feature higher interest rates. This is why revenue-based financing is typically designed for short-term needs rather than long-term needs.
5.4. Small Business Administration (SBA) loans
The SBA offers a number of different funding programs through participating lenders. Participating lenders can be found online or through local banks and organizations. SBA loans are a popular funding type because they feature low-interest rates, high funding amounts, long terms, and can be used for a wide range of business expenses.
The only downside to SBA loans is that they can be fairly difficult to qualify for. You’ll need good credit and at least 2 years of business history. Plus, you’ll also have to meet the SBA’s size standards.
Common types of SBA loans include:
SBA 7(a) loans: SBA 7(a) loans are one of the most popular funding programs. These loans offer up to $5 million in funding with repayment terms as high as 25 years. You can use funds from a 7(a) loan to hire staff, purchase office supplies, launch marketing campaigns, or renovate your office space.
SBA 504 loans: This is a long-term, fixed rate financing solution with funding amounts as high as $5 million. SBA 504 loans are generally used to purchase major fixed assets, like real estate or computer software systems. They can be ideal if you’re looking to finance an office space or another commercial property.
5.5. Private equity financing
Working with a private equity firm can get you access to the capital you need to make major moves in your business. Private equity firms can also be beneficial because they offer unique opportunities.
They can help you network and connect with other professionals in your field. They can also provide a host of resources aside from a cash infusion. In some cases, they can even offer advice and industry expertise.
Private equity firms usually have a vested interest in your business’s success. This is because when you work with a private equity firm, you are typically required to relinquish ownership shares. Although this can help you secure more funds, it can ultimately result in you losing management control or diluting ownership in your business.
6. Setting your short-term vs. long-term goals
Managing a legal practice requires you to distinguish between short-term and long-term goals. Long-term goals can include your vision for your firm and where you want to be several years from now. From there, you can work backwards to develop a strategy.
Short-term goals can include plans you’re looking to implement within the next year or less. This can include hiring staff, ramping up advertising efforts, or moving into a new office space. Depending on whether your goals are long-term or short-term, a different financing type might work better over another.
For example, term loans with lengthy repayment periods and regular monthly payments are better suited for financing long-term projects. However, working capital loans or a merchant cash advance, can be an ideal source of fast financing to foot immediate expenses.
Short-term loans can also be easier to qualify for and have generally faster approval times. The only downside is that short-term financing typically features higher interest rates.
7. What are the advantages of law firm financing compared to traditional bank loans?
Law firm financing has significant advantages over traditional business loans. One of the most noticeable perks is the unique financing structure designed with legal professionals in mind, which often allows for lenders to acknowledge your unearned contingency fees as collateral when banks won’t.
This can be problematic and hinder your chances for approval. But law firm financing works differently.
When you work with an online lender that specializes in this funding type, you’ll find they’ll be more willing to offer solutions based on the specific needs of your business.
Small business funding approval rates are also much higher at online lenders than compared to banks. Online lenders are able to work with you when it comes to meeting requirements. They offer a larger range of solutions based on different credit scores, business histories, and more.
Another bonus is that online lenders are known for having incredibly fast processing times. In many cases, funds deposit in 24 hours or less. The main downside is that online lenders can occasionally be more expensive. Especially if your credit score isn’t great, your interest rates may be higher than those on traditional bank loans.
8. What are the requirements for law firm financing?
Requirements for law firm financing can vary greatly depending on the type of lender you choose to work with. However, in most cases, you should expect to provide business financials, credit scores, legal documents and your personal financial history.
Online lenders are known for being more lenient when it comes to requirements and can offer more tailored solutions to law practices.
On the other hand, banks can be more rigid – oftentimes only willing to work with established businesses. They may also have fewer funding solutions and longer application processes.
Even between different lenders, there are a few similarities when it comes to law firm financing requirements. At a glance, you should still expect to provide the following:
- Business financials, such as balance sheets, bank statements, tax returns, profit and loss statements, debt to equity ratio, expense ratio, cash flow history and projections, and debt schedule
- Credit scores
- Legal documents, including business licenses, medical licenses, and registrations
- Personal financial history, including bankruptcy or liens
SBA requirements for law firm financing
SBA funding can be even more difficult to obtain. In addition to the requirements outlined above, you’ll also have to show:
- For-profit business
- Located and operated within the United States
- Business owners must have invested equity
- Demonstrable need for financing
- Zero outstanding debt to the U.S. government
- Business owners can’t be on parole
9. Compare different law firm financing solutions
Whether you’re opening a law firm for the first time, acquiring another practice, or if you simply need help meeting short-term funding needs – law firm loans provide the capital needed to reach your goals and grow your business.
As you browse different types of law firm financing solutions, it helps to have multiple options to choose from. However, you don’t need to apply with multiple lenders.
With National – a top online small business financing marketplace – you can receive multiple personalized lending offers based on your specific criteria via one application. You can browse various funding products, rates, and terms you qualify for before selecting the best fit.
Learn what business financing solutions you could qualify for here.