Large litigation, small transactional, solo criminal; it isn’t unusual for law firms in all specialties and of all sizes to experience issues with financial constraints as a result of insufficient working capital. Even law firms that have full portfolios of favorable cases; however, access to assets can be delayed as a result of prolonged litigation. Fortunately, law firm funding realizes the benefit of meritorious legal cases and offers law firms and attorneys the chance to collateralize their cases in order to establish reliable access to cash, and in turn, boost the services they offer their clients, as well as invest in the growth of their businesses, and ultimately, enhance their success.
To learn more about law firm funding, including the advantages, the different types of financing options, who uses law firm funding, and more, please continue reading.
The Advantages of Law Firm Financing
More cash flow, improved client services, and increased success; these and more are some of the benefits that are associated with law firm financing.
- Increased cash flow. Businesses of all sizes and in all industries need a consistent flow of cash, and law firms are no different. From employee payroll to marketing your services to your targeted demographic, and from client intake to acquisition; these are just some of the reasons why law firms need a reliable and consistent cash flow. The impact you would feel if you had to halt marketing campaigns, payroll, client intake, acquisitions, and everything else that keeps your law firm running because of cash flow issues – even if only for a short period of time – would be massively detrimental. With law firm funding, you can be sure that you will have access to a steady and reliable flow of cash that you can use to continue activities that generate revenue for your law firm.
- Faster growth. While it’s true that your law firm’s growth largely depends on the services and results you offer; however, there’s another key factor that also has a significant impact on your firm’s growth: money. A law firm’s growth is dependent on the type and amount of available resources. Law firm funding can assist you with increasing the growth rate of your business, as it can ensure that you will have access to the money that’s needed to capitalize on things that will advance your business, such as software, developing and maintaining a website, marketing, practice management, employing office staff, and more.
- Improved service and more options. With law firm funding, you’ll have access to more working capital, and with that working capital, you will be able to provide your clients with better services and more options. For instance, you may be able to employ a larger staff, and you could potentially offer more flexible payment options for the services that you provide; two things that would certainly be beneficial to your clients.
- Reduced monetary risk. Interest rates are increasing at an unprecedented rate, and they show no signs of stopping. As such, taking out a more traditional loan can be a serious risk, as there’s a serious chance that you will end up struggling to repay – or even potentially default on – your loan. With law firm financing, interest rates are nowhere near as high as the rates on traditional loans, which makes this a much less risky way to access the funding your law firm requires.
How to Finance a Law Firm with help from a Litigation Finance Firm
As the name suggests, law firm financing (or funding) is an effective way to fund a legal firm. This type of funding is a financing structure that was specifically designed to meet the needs of attorneys and law firms. Examples of some of the most effective methods that can be used to finance a law firm include:
- Small Business Administration (SBA) loans
- Business loans
- Private equity
- Lines of credit, including credit cards
- Personal cash
For an overview of the best financing options for legal firms, keep on reading.
- Personal cash. Cash is always king. Cash from a variety of sources, such as savings, retirement funds, and even home equity loans, are just some of the ways that you can access financial support in terms of personal cash. There are advantages and disadvantages of using personal funding rather than other types of financing for your law firm. If you have the means, using your own personal cash is a great way to finance your law firm; however, before you do, it’s important to note that you do need to do so with care. Regardless of how much personal money you have access to, you should carefully consider the risks that are associated with putting your own money into your legal firm. Furthermore, if you intend on using your own personal money, you have to educate yourself about any tax-related repercussions. If you have the means and you decide that you would like to use your own personal cash to finance your law firm, working with a financial expert that specializes in small businesses before you commit is highly recommended. A financial expert can be an invaluable resource, as they can educate you about different options that you may be eligible for and that may be beneficial, such as grants, low-interest financing options, and tax incentives.
- Revenue-backed financing. With this type of financing, you can raise capital for your legal firm by pledging to commit a certain amount of revenue you may receive in the future in exchange for the monetary funds that are invested. For instance, you would give a pre-set percentage of the revenue that your legal firm earns to investors until your firm repays a portion of the original investment. One of the main benefits of revenue-backed financing is that it is typically quicker than other types of funding options that are available to law firms. Furthermore, there are some revenue-backed financing firms that will let you repay the funds that you borrowed according to your monthly flows of cash.
- Unsecured lines of credit. Similar to small business loans, unsecured lines of credit can provide your legal firm with monetary funds that you can use to put toward business-related expenses. Comparatively, with a small business loan, your law firm will be required to put a lump-sum payment into a small business loan account when it’s opened, and you’ll have to make monthly payments to the account. With a line of credit, your law firm may not need to make monthly payments. To illustrate, like a credit card, a small business line of credit is revolving, which means that interest rates will begin to accumulate when you start withdrawing funds. It also entails a credit review, as well as a renewal on an annual basis. Additionally, the amount of money you can borrow for your law firm is equivalent to the amount that you pay, minus interest, as you repay the balance. Also like a credit card, the lender will set a pre-determined limit on the amount of money that you will be able to borrow.
- Personal credit cards. It’s estimated that almost half of all American small businesses utilize personal credit cards to fund their business endeavors, and a large percentage of those small business owners do not distinguish their business-related expenses from their personal expenses. It’s important to understand that there are risks associated with using a personal credit card as a way of financing your law firm that you are personally responsible for the debts that are accumulated. Though personal credit cards may charge lower interest rates, which can be very tempting, there is a chance that your legal firm won’t be bringing in enough revenue when you first get started. As such, accumulating debt on personal credit cards could make you exempt from other kinds of financing in the future.
- Law firm funding. Newly established law firms may not be eligible for business financing. Financial institutions will request proof of your firm’s assets and credit for collateral purposes; if you don’t have these things yet because you just launched your law firm, other options may be possible. In addition to a standard business loan, you might also want to consider taking out a bank-backed personal loan, or if you have trusted family members or friends who have the means, you might want to consider asking them if they would be interested in providing you with a loan that you would repay.
No matter what your financial situation may be, there are many different types of loans available for your law firm. There are pros and cons associated with each of these options. Below, we’ll explore the different types of loans and the advantages and disadvantages of each one.
The Best Loans for Law Firms
Deciding which types of loans would be the best for your legal firm depends on several factors, such as the amount of capital that your legal firm requires and how long it will take you to repay the funds that you borrow. There are several benefits associated with law firm funding, as it is specifically designed for lawyers and the legal services they provide.
That said, the best kinds of loans for legal firms include the following:
- Small Business Administration (SBA) loans
- Pros: Interest rate caps are often offered on SBA loans, which can certainly be reassuring.
- Cons: The closing process or an SBA loan can be long and drawn-out, and often, a substantial amount of collateral is required.
- Bank-backed business loans
- Pros: If you have an established relationship with a financial institution and that relationship is in good standing, the bank may be able to provide you with financial services and perks that you can put toward your law firm.
- Cons: Newly established law firms often find that qualifying for a bank-backed loan is difficult. Furthermore, the process of applying for a bank loan is usually quite long, and if you are unable to repay the loan, your assets could be in jeopardy.
- Working capital loans
- Pros: Working capital loans pay out and can be repaid quickly, which means you won’t have to repay the debt over a prolonged period of time.
- Cons: Similar to a standard bank-backed business loan, you might need to offer collateral if you are unable to repay the money you borrowed; moreover, the interest rates can be high, and if that’s the case, repaying the loan may not be financially worth your while. If you decide to go with this option, do your due diligence by shopping around for the best interest rates.
- Private equity
- Pros: Firms that supply private equity can assist you with assessing all aspects of your law firm. Plus, private equity firms do have a vested interest, as they need to repay the investors, which means that they will want to secure the best for your law firm in regard to the amount of revenue your law firm generates. Furthermore, you will be able to secure a lot more funding from a private equity firm than you would be able to secure from other types of financial institutions.
- Cons. Though the fact that private equity firms can assist you with assessing all aspects of your law firm, this can also be a downside, as you may not want them to know everything about your business.
- Short-term loans
- Pros: Generally speaking, you will likely have access to the funding that a short-term loan can provide rather quickly. Plus, it’s easier to qualify for short-term loans, and the application review and approval period tends to be relatively short.
- Cons: The interest rates on short-term loans tend to be very high, which means you’ll incur a higher amount of debt and will need to make larger or more frequent payments.
- Business acquisition loan
- Pros: With this financing option, collateral isn’t required, making a business acquisition loan a viable long-term solution. Additionally, approvals are often granted quickly.
Cons: You will need to provide a record of your cash flow, and your credit score will need to be checked. Also, interest rates vary, and depending on your available cash flow and credit score, the interest rate may be high.