Law Firm Financing: The Comprehensive Legal Guide
Law firm financing is something many lawyers and legal practitioners avoid talking about. They want to focus on doing what they love – delivering incredible legal service to clients – rather than worrying about the financial decisions of running a firm. However, all successful law firms must be profitable so they can afford to employ lawyers that can best serve their clients. This is where financing for lawyers comes into play. In this article, we look in more detail at what we mean by law firm financing. We also look at the available funding options to help you grow your practice into a success.
What is Law Firm Finance?
Law firm financing, otherwise known as law firm funding, is an innovative way in which firms can cover business costs using “non-recourse capital” or “non-recourse funding.” This refers to a specific type of commercial lending where the lender issues repayments only from the project that the loan is funding and not from any other assets. Examples include the following:
- Litigation Funding: Also known as disbursement funding, this refers to any expenses incurred while defending a client. Examples include costs of expert witnesses, court filing fees, arbitration fees, attorney fees, and other litigation financing costs.
- Working Capital: This refers to the capital of the firm that is used in day-to-day business operations, such as covering the salaries of employees, renting an office space, or paying for other overhead or operating expenses.
- Marketing Programs: Law firm funding can alternatively go towards marketing costs to develop a new marketing and outreach strategy. This includes the paying marketing agencies, money towards paid advertisements, or tool and subscription services.
No matter which of the above three areas financing is used for, the overarching goal is business growth. Receiving funding helps legal firms to grow and expand, presenting new services to clients and reaching new customers. It is an essential part of business for any law firm wanting to improve their offerings and become a larger company, opening up development opportunities that the company wouldn’t have funding for otherwise.
What are Law Firms’ Financing Options?
There are many different types of funding for law firms available, and choosing the right one for your business is essential in helping the company grow, develop, and expand. Here is a look at the most frequently used types of law firm financing and the advantages and disadvantages of each.
1. Personal Cash
If you have large amounts of personal cash, this can be put into a business to facilitate growth. This could be in the form of cash savings, retirement funds, or home equity loans. Many law firms use a personal cash injection when initially starting out, but you can use a cash deposit when driving specific areas of growth later on, too. If using personal cash as a means of law firm funding, never completely wipe your savings. There will always be a need for money outside of the business for your personal life, so think carefully before committing too much, and make sure to keep a cash cushion in the bank.
2. Revenue-Based Financing
Your next option is to look at revenue-based financing for law firms. This is where the company pledges a percentage of their future income in return for the loan they receive as an investment. The firm then pays back the loan at this predetermined percentage until they have paid it all off. This is a popular option as it is usually one of the faster law firm funding options to be accepted. Moreover, the repayments are based on a percentage of the business’s monthly cash flow rather than fixed monthly repayments. This makes repayments much easier to manage and avoids situations in which the firm cannot pay back what is owed to the lender.
3. Credit Cards
Another option is to get a credit card to cover any additional funding for law firms. Many people own personal credit cards and prefer this option for business as it is familiar. Besides, credit cards often have lower interest rates than loans, which means less money must be paid back over time. If you do decide to use credit cards, be sure to get a business account that keeps costs of the firm separate from personal finances. When using a personal credit card, you will become liable for any debts owed rather than them belonging to the business. Additionally, bear in mind that despite having a lower interest rate, money spent on credit cards will have to be paid back more quickly. Failure to pay your credit card bills on time can prevent you from being able to obtain law firm loans in the future.
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4. Law Firm Loans
The final law firm funding option is to look at different types of loans. There are a vast number of law firm loans available. The best loans for your business depend on how much capital you need and how soon you will be able to repay the money. Here is a look at some of the most popular options among law firms and legal professionals:
- Small Business Loans: These types of law firm loans are made with a specific focus on new businesses that are just starting out. They usually have capped interest rates which makes them popular for people wanting predictable repayments. However, they also often require collateral as a guarantee in case your firm fails to be profitable. For example, you may have to leverage your home or other personal property against the investment.
- Family and Friends Loans: Reverting to friends and family to provide financing for law firms is great if you know someone who has money they are willing to invest. Moreover, because of the close relationship, they tend to be lower interest and better for the firm financially. However, consider the strength of the relationship with this person and the strain this can put on your relationship if the borrowed funds cannot be paid back.
- Financial Institution Loans: Filing for bank loans is another option, especially if you already have a great and trusted relationship with your bank. However, new business owners may struggle to get their bank to agree to lend money, and the application process can be unnecessarily lengthy. As with small business loans, other assets are also leveraged in instances where the law firm loan cannot be paid back.
- Merchant Cash Advance: Using a merchant cash advance (MCA) as a means of law firm funding is a great choice as it doesn’t require any collateral. However, they are known for having high APR rates that are commonly deducted daily from a firm’s cash flow. This can be difficult to plan for, especially for new firms that are unsure of their usual cash flow rates.
- Business Acquisition Loans: Another option that doesn’t require collateral is business acquisition loans. They provide secure, long-term financing for law firms but aren’t as good for short-term funding. Moreover,you will sometimes need to prove that you have tried other types of funding before filing for a business acquisition loan, plus interest rates can be high.
What are the Benefits of Law Firm Financing?
The main advantage of law firm financing is that it accelerates business growth. It allows for a lump sum of money to enter the firm’s cash flow cycle that can be used for a range of litigation expenses, operational costs, or overheads. Doing so has several benefits, which include the following:
- Improve Cash Flow: A large cash injection into any business helps with the firm’s cash flow. All law firms need a steady flow of working capital so that the company can keep running and keep up with its competitors. Law firm funding helps generate more of this working capital so it can be used as the business deems necessary.
- Help Firms Grow: Having money to spend on things such as new marketing campaigns helps law firms to expand their reach and attract more customers. At the same time, the funding can go towards paying salaries or it can be used to secure larger offices. This again works at growing the size of the firm to keep up with client demand.
- Acquire Top Legal Talent: Employing top professionals in the legal industry that offer the best client experience comes at a price. Financing for law firms allows the business to employ the best in the industry. This will enhance the reputation of your firm and attract more clients.
- Afford Top Expert Witnesses: The outcome of a case is often dependent on the testimony of the expert witness. These are other costly expenses that law firm loans can cover. Doing so gives you a better chance of winning the case, again improving the client experience and reputation of the firm.
- Offer Alternative Fee Arrangements: Many people searching for a law firm are interested in flexible payment options. Having more working capital allows you to provide clients with this option, such as letting them pay the anticipated fees in a subscription-based or fixed-fee billing model.
- Reduce Financial Risk: Traditional business loans can be risky. Many require you to leverage collateral against the value borrowed and come with hefty interest rates. However, law firm financing is a safer and less financially risky option thanks to their use of non-recourse capital.
Any law firm that is either just starting out or that is looking to expand their business and grow their success needs to consider law firm funding and financing options. Doing so provides more working capital to utilize. This benefits employees, clients, and the firm itself. However, choosing the right law firm loans or financing options is crucial for minimizing the financial risk of borrowing and ensuring the added cash flow proves a success. Therefore, we always advise on speaking to financial professionals for advice. Additionally, talking to other attorneys who have started their own law firms is recommended for real-world examples of the financing options available.