Why Lawyers Should Get Law Firm Financing

Like any business, running a law firm has unique challenges and operating costs. Law firms tend to have high labor costs, typical business overheads like real estate leases and insurance, as well as marketing costs and other expenses.

Cases at law firms aren’t always predictable, which can create fluctuations in revenue and cash flow. This is just one reason why it’s so important to understand the law firm funding that’s available to your business.

In this article:

• Why law firm funding is so important
• The challenges of getting law firm lending
• How to improve your chances of getting approved by banks and law firm funding companies

What is law firm funding?

Unlike other types of businesses that may have equipment or inventory to use as collateral, law firms typically don’t have much collateral to offer. This can make law firm lending difficult, as traditional small business financing options often require business collateral to secure a loan.

Financing for lawyers usually requires a more innovative solution. That’s why specialized law firm funding exists.

Law firm funding is a financing model designed to help attorneys and lawyers in different practice areas, such as personal injury or class action, secure financing through non-recourse capital.

Non-recourse capital is the expected profits of a project for which the loan is funded. Essentially, there are no assets for these loans. Instead, commercial lenders or law firm funding companies carry the risk with the borrowers.

This means that collections on payment are assisted by the lenders that lend to banks. This additional interested party tends to help law firms collect outstanding revenues. There are also no fixed payments with law firm financing, as this risk is shared by the lender.

Why traditional loans are challenging for law firms

Law firms have a somewhat unique business model that complicate traditional financing options. Banking for law firms is more complex due to the unavailability of assets, unpredictability of revenue, and other problems related to revenue collection.

First, law firms typically do not have many assets. Due to high labor and operating costs, much of the cash on hand is designated to pay employees and general operating expenses. While some law firms may own their office building, many don’t. Besides cash, the only assets a firm may have are office furnishing and supplies. Generally, this won’t amount to much in the way of collateral, which raises the risk of default for a lender.

When working with law firms, many traditional financial institutions like banks or credit unions charge unearned contingency fees to reduce the amount of cash flow dispensed to your law firm if it fails to collect sufficient revenues. This type of litigation finance can lead to further cash flow problems down the line, perpetuating a cycle of debt. They do this because law firms often struggle to make regular monthly payments due to varying client work and incoming revenues.

A relative lack of liquidity, a lack of assets, and occasionally irregular revenue all complicate law firm lending and make banking for law firms a complex challenge. That’s why law firm funding exists.

Why you should use law firm funding

Law firm funding can improve cash flow management, allow you to offer more flexible payment terms for clients, and even improve case outcomes.

Improved cash flow management

In the absence of law firm financing, you may struggle to keep up with normal operating expenses, like marketing campaigns, advertising, or other business development initiatives. This reduces your new business and can limit future cash flow, which will lead to additional cash crunches in the future. Law firm funding can improve your cash flow now and allow you to invest in resources to improve it in the future, too.

Expand your firm

One of the best reasons to get law firm funding is that it can help you expand your practice. The cash advance from law firm financing can help you invest in your law firm. Whether it’s software to improve productivity, marketing resources, hiring new lawyers, or opening up a second office, investing in your firm allows you to do more business and raise your earning potential.

Flexible payment terms

You want to give your clients the best experience possible. An important part of that is offering reasonable payment terms.

Law firms tend to charge hourly or on a retainer, both of which can be extremely expensive. (Especially for individual, non-corporate clients.) With law firm financing to fall back on, you may be able to offer more payment flexibility for clients, like fixed payments over a period of time. This can give your firm an edge in a competitive marketplace.

Improving case outcomes

Law firm funding provides your lawyers with the funding they need to succeed in cases. Sometimes, litigation takes a long time and gets very expensive, but you still need to stick it out to get the best outcome for your clients. Having the funds to endure drawn-out cases can help improve case outcomes and improve your reputation in the industry.

Moreover, great witnesses and experts can make all the difference in certain client cases. Between paying for expert time, the research required during discovery, and investigative costs, your firm may have to pay a lot upfront for a case. Law firm funding can bridge those costs and the eventual settlement.

How law firm funding works

Traditional lenders, online lenders, and law firm funding companies all may offer law firm financing programs. However, this unique financing structure may not be available everywhere so it’s important to do your research before applying.

To gain funding through non-recourse capital, you’ll need to find a partner that understands how your business works and is willing to work with your unique business model to support your needs.

That said, there are plenty of traditional financing options that may also serve your needs if you can’t find a specific law firm financing partner.

Alternative law firm funding options

Like any small business, financing for lawyers is available through a range of loan options. We break down a number of those options here.

Term loans

The most conventional small business loan type, term loans are when a lender pays an upfront sum and a borrower pays it back, plus interest, with monthly payments through the loan term. Term loans have a fixed interest rate or variable interest rate.

Both traditional lenders and online lenders offer term loans, and eligibility requirements vary between lenders. Typically, online lenders offer faster approval and funding times, as well as less strict requirements. Nonetheless, to get the best interest rates, you’ll need a strong credit score, at least a year in business, strong annual revenues, and may have to put up unearned contingency fees as collateral.

SBA loans

The United States Small Business Administration (SBA) helps small business owners find affordable financing and favorable repayment terms on loans. SBA loans are small business loans designed to lower the risks of lending to both borrowers and lenders, incentivizing more small business owners to apply and get approved for funding.

The most popular SBA loan program is the SBA 7(a) loan. These loans have a maximum loan amount of $5 million and offer competitive interest rates. You can use this funding for essentially any business need, from working capital to buying inventory, purchasing real estate, and more.

The SBA 7(a) loan program prohibits lenders from charging your law firm for early repayment on the loan, which means that your law firm can more easily get out of debt and find the debt more affordable. This might make particular sense for your law firm since the revenue from your cases can vary throughout the year.

Business lines of credit

Another flexible law firm funding option is a business line of credit. Part loan, part credit card, a line of credit gives you an approved maximum credit limit that you can withdraw from when you need funds. With revolving lines of credit, once you repay that amount, plus interest and fees, you’ll have access to the full amount again.

This is particularly useful for law firms that struggle to predict future expenses. For example, if you’re low on revenue in a particular time period and you need to fund witnesses or certain casework, you can draw down on credit. You only pay interest when you have to make a withdrawal and, once it’s granted, you can get the funds very quickly.

Lines of credit are available from banks, alternative lenders, and credit card companies, and typically come with variable interest rates.

Working capital loans

A working capital loan is a good short-term solution if you’re dealing with seasonal cash flow issues or need emergency funding.

Depending on the type of law that you practice and the nature of your industry, your law firm might experience a fluctuation in revenue depending on the time of year. A working capital loan can support your litigation funding and sustain the legal professional salaries at your firm during periods of low revenue.

A working capital loan provides an increase in cash flow If you have a lot of assets and not a lot of liabilities, you can help leverage this to get a working capital loan for your law firm. Your law firm can use the funds during the times of year when revenue is low and repay them when you have a lot of cash flow. This can temporarily help, but it may not be a good long-term law firm funding solution.

Business credit cards

If your law firm does not have a lot of serious expenses, you might be interested in shorter-term funding options. If you need to buy certain things for your law firm, such as inventory, deal with travel expenses, or have certain kinds of related purchases, credit cards are a good asset. As a temporary solution, your business credit card can provide you with enough credit to cover small eligible expenses.

Credit cards allow businesses to earn rewards like cashback to travel rewards points. While the APR tends to be high on credit cards, it’s still a viable short-term law firm funding solution.

Final thoughts

Law firm lending is complex, and many firms present higher risks to lenders because of their unique business model. While specialized law firm funding can allow law firms to avoid putting unpaid contingency fees up as collateral, there’s not an abundance of law firm funding companies or specialized law firm banking solutions. Fortunately, there are plenty of more conventional solutions that may serve as viable law firm lending options to support your business.

FAQs about law firm funding

Why do law firms struggle to get financing?

Law firms typically have few assets to use as collateral, high operations costs which limits the cash flow available for loan down payments, and may have unpredictable revenues. All of this makes them riskier borrowers to conventional lenders.

What types of financing are available to law firms?

While specialized law firm funding may be available to your firm, other options to consider include term loans, SBA loans, business lines of credit, or working capital loans.

What are the benefits of law firm funding?

Some of the most significant benefits of law firm funding are an improvement in cash flow, a greater ability to invest in expansion, and the opportunity to offer more flexible payment options and improve outcomes for clients.

What is non-recourse capital?

Non-recourse capital is the expected profits of a project for which a loan is funded. Basically, commercial lenders or law firm funding companies provide non-recourse capital to law firms, which may pay the lender back, plus interest, as it collects outstanding revenues. In some cases, lenders may assist with this revenue collection.

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