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!
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.
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, hiring legal professionals, or more – law firm financing could help solve many of the problems law firms face.
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 of law firm financing.
Improve Growth Prospects
Financing can provide the much-needed resources you need to scale your business. You can 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.
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)
Improve Cash Flow
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.
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.
Improve Your Client Experience
Law firm financing can help you improve your customer experience in more than one way. You can use financing to enhance customer-facing channels, or you can offer flexible payment options to your clients.
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.
Hire Top Legal Professionals
The success of your law practice ultimately boils down to your legal talent. 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.
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.
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.
Financing can help provide a cushion to help you take care of all these expenses and more.
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.
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.
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.
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.
|Type of Financing||Description|
|Term Loans||Term loans provide a lump sum of capital that’s repaid with regular payments over time. They can be short-term, about a year or less, or long-term, in some cases as long as 25 years.
Funding amounts and interest rates can vary depending on your personal and business financial criteria. Term loans are ideal when you know the exact cost of a particular project.
This type of loan can also be used to finance operating expenses, hire staff, acquire another business, refinance, and more.
|Business Line of Credit||Business lines of credit are some of the most flexible forms of financing on the market. You’re granted a credit line and a set limit, where you can withdraw funds from your credit line as needs arise. You’ll only have to pay interest on what you borrow, and 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.
|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 fees, via a predetermined percentage of the income you bring in for a set period of time.
Your payments will be based on your business’s monthly cash flow instead of fixed monthly payments.
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.
|Small Business Administration (SBA) Loans||The Small Business Administration (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.
|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.
Latest Trends in Law Firm Financing
2023’s economy has been difficult for entrepreneurs to navigate. Between inflation and high interest rates on financing, the climate has forced business owners to get creative.
That’s not to say that entrepreneurs have set their growth plans aside, though. Businesses have turned to non-bank lending options like never before to access the capital they need to take advantage of opportunities and solve challenges. The cost of capital might be high, but if the opportunity makes sense, the most successful businesses are securing the loans they need without looking back.
Law firms, specifically, have been outfitting their practices with technology, like CRM software and internal file management systems, to increase efficiency and productivity. They’re also investing in digital infrastructure to support a wider range of client needs.
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 backward 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. Alternatively, working capital loans or revenue-based financing can be an ideal source of fast funding to foot immediate expenses.
Short-term loans can also be easier to qualify for and generally have faster approval times. The only downside is that short-term financing typically features higher interest rates.
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.
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
Compare Different Law Firm Financing Solutions
Whether you’re opening a law firm for the first time, acquiring another practice, or 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 Business Capital, 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.