How to Obtain Financing for Law Firms
Financing for law firms differs from financing for a lot of other businesses in terms of what types of funding are available and how loans are repaid. A law firm’s primary goal may be to handle legal matters and clients, but operational costs can still go beyond the revenue at some points. Further, funding may be required at times to support the success or growth of the firm.
It is almost always more logical to seek outside funding than to put the state of the firm’s cash flow at risk. Here is a look at how to boost the chances of getting financing for law firms.
Reasons for Financing for Law Firms
Good cash flow can be a must when it comes to supporting the growth of the firm, and the existing incoming profit may not always be enough to cover the desirable expenses. A few reasons a firm may need financing include:
- Implementing new practice management software
- Building a digital marketing strategy or virtual law firm
- Sustaining a marketing strategy when incoming funds are lacking
- Hiring outsourced professionals, such as a temporary paralegal to help with a large case
- Funding expert witnesses or research efforts
Whether a firm is in the process of growing and needs a new physical location or needs to improve cash flow temporarily, seeking funding may be necessary.
How to Find Financing for Law Firms and Get Lender-Approval
Because a law firm is a unique type of service industry and cash flow is not always so stable and predictable, obtaining financing for law firms can come along with challenges. Therefore, it is best to take a few steps before ever seeking funding to increase the chances of getting approved by any lender. Here is a closer look.
- Know financial goals for the short and long-term
A good documented financial plan and forecast help understand cash flow and how financially healthy the firm is. These are important factors to know when choosing law firm financing. The more in-depth an understanding of the financial status, the more equipped a financial overseer from the firm is to make the best decisions about how much funding is needed and how the firm will handle paying back what is borrowed over the long term.
- Consider all potential funding options
A few types of financing and loans to consider include:
- Business acquisition loans
- Accounts receivable financing
- Merchant cash advance
- Private equity lines
- Working capital loans
Usually, financing for law firms is uniquely tailored specifically to how a law firm operates. For example, it may be more difficult for a law firm to obtain a standard bank loan that involves lump-sum funding and a course of repayments. However, the firm may be able to get non-recourse financing or capital. Non-recourse capital is commercial funding that involves the lender getting paid when the funds loaned to fund a project actually profit. These types of law firm financing do not involve fixed payments, which can be more ideal for how a law firm’s cash flow tends to go.
A small business line of credit, which is a revolving line of credit a lot like a credit card, is an option for some firms. With this type of loan, the lender sets a predetermined limit on how much the business can borrow. The business then borrows up to that amount and makes monthly minimum payments on the money borrowed and interest accrued. Small business loans are something to consider as well. However, this may not be an option for a newer firm without a lot of documented proof of annual revenue.
- Compare and contrast loan options
Once the most fitting options for financing are narrowed down, compare and contrast the options and the pros and cons of each. All types of financing can come along with their own perks. For example, if a firm borrows money to cover implementing new technology, consider how that technology will increase revenue and if that will be enough to cover repayment without impeding cash flow.
Look at everything about a funding option, from when the interest starts to accrue to what repayment will be expected. Interest rates and costs associated with borrowing can vary substantially from one type of loan to the next. For example, a merchant cash advance can have rates between 20 and 250 percent, while a standard small business loan may have rates closer to between 3.75 and 10.25 percent.
- Bring in the Help of a Fractional CFO
Before seeking financing for law firms, bringing in the help of an experienced financial expert can be a vital move. Many law firms simply have an accountant or bookkeeper, but they do not have an in-house, full-time chief financial officer (CFO). Bringing in the help of a fractional CFO before seeking financing will ensure:
- All ledgers and reports are well laid out and documented
- There is a financial strategy in place to support the firm’s revenue
- There is less of a risk of undiscovered cash flow issues
- The firm has a financial expert to negotiate with lenders
When a lender sees that a firm is working with a fractional CFO, they may be more willing to extend the financing for law firms for a few reasons. For one, financial reports for the firm are meticulous and in-depth, which gives the lender a better idea of the cash flow within the business. Two, a fractional CFO means a firm is serious about the financial health of the operation.
Considering financing for law firms and needing financial advice? Reach out to The A Team to find out how a C-Level financial professional could make all the difference.