Law Firm Financing: How to Finance Your Law Firm
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Whether you’re straight out of law school, or an attorney who wants to branch out on your own, starting a new law firm requires money. How much you’ll need will vary from what kind of firm you want to start and with whom. Figuring out where to get funding to take that first step in owning your own practice requires a lot of research, and a bit of luck. It may seem like the odds are against you, but there is help available.
- How to finance your law firm
- How to finance your law firm expansion
- 5 tips to manage your law firm’s finances
How to finance your law firm
If you’re starting out as a lawyer fresh out of law school, that means you’ll be joining the more than 1.3 million other lawyers already practicing in the U.S. — it also means that you’re likely carrying a little more than $100,000 in student debt. You may be reluctant to take on more debt to start your new law firm, but there are low-cost law firm financing options. We’ll also give tips for saving money in your new practice that may reduce the amount, if any, that you’ll have to borrow.
Banks. The most obvious and desirable choice for funding, but also the least likely. Banks and other financial institutions are unlikely to lend money to people starting a new businesses, as they view it as a risk.
If you don’t get a approved for a business loan, it might be worth looking into a personal loan.
SBA. The U.S. Small Business Administration (SBA) does not provide funding directly, but it does guarantee loans. SBA loan applications are generally lengthy, but may provide a path to financing for businesses that otherwise may not qualify for bank loans. The flagship 7(a) program is popular because it provides large loan amounts, up to $5 million, that may be used for a variety of business uses and repaid up to 25 years. SBA loans come with competitive rates but can be more labor intensive to apply for and difficult to obtain.
State bar associations. Bar associations and their charitable foundations offer funding for law firms via loans and grants that are typically used to finance certain projects. So while this type of funding may not necessarily be used for startup costs, they could help underwrite important work your firm may be doing that benefits the community. The amounts and criteria vary from state to state, with some funds available to individuals practicing a certain type of law.
Friends and family. A tried and true method is to borrow money from those you know. Not everyone has a rich uncle to pay for everything, but getting some help from loved ones could be just what you need to get a firm up and running. If you borrow, though, it’s best to keep it professional.
“If you’re getting money from family and friends, try to keep it at arms length as possible,” said Bruce Borenstein, president and CEO of PH Advisors. “Make a promissory note and offer a competitive interest rate even though it’s somebody you know or a family member.”
Crowdfunding. There are multiple sites available to get a new business off the ground via crowdfunding such as GoFundMe and IndieGoGo. Before proceeding this route, however — you may want to check with your state bar association to see if there is any issues with this kind of funding since it’s fairly new.
Home equity. A young lawyer right out of law school may not have a significant amount of assets to make use of, but an established lawyer going out on their own may. Owning a home is a great resource for tapping into for funds with a home equity loan or line of credit. That said, keep in mind that using your home as collateral for a home equity does mean that if you default on the loan, the bank may take possession of your home.
Online banks. Alternative lenders such as Kabbage offer loans to law firms. Such online lenders typically have more lenient requirements for approval than banks, but rates may be higher.
How to finance your law firm expansion
Expanding an existing law firm may be easier than financing a startup practice. Lenders may see you as less risky, which means less of a toll on your own resources.
Banks. Unlike a startup that might have few, if any, clients, an established firm will have a proven track record. However, the big banks may not be the best place to try at first.
“Avoid the big banks,” said Jeremy Hill, founder of JB Capital. “Local community banks are a lot more flexible and more aggressive. Oftentimes they’re going to rely heavily with the insurance and protection from the SBA.”
According to Hill, smaller banks are more willing to work with small businesses, especially law firms. Connecticut-based Webster Bank specializes in law firm financing. They will also look at possible backing from the SBA to help provide more security for the loan. Ameris Bank, for example, helps law firms apply for SBA loans.
Litigation-based financing. There are organizations that are willing to loan money based on the lawsuits your firm is working on. It will depend on how much money is tied up in the lawsuits that are currently in litigation and what kind of cases they are. Burford Capital is one of the largest, but works with startup practices to Fortune 500 companies.
Investors. If your practice is really taking off, it’s possible to tap into venture capitalist funds. It’s a matter of finding the right people with money who want to invest. Still, some state bar associations may look at taking investor money as a possible conflict of interest, so be sure to check before going down this route.
5 tips to manage your law firm’s finances
- Make use of technology — Use the full extent of tech available to you. Get software for accounting purposes (versus an on-staff accountant), and try to reduce costs by using your cell phone for all communications and apps for services such as photography or recording client statements, rather than hire staff or contractors.
- Be flexible — If you’re a one-person shop, you could save money on overhead by working from home. If you want to bring other attorneys into your firm, remember that businesses are able to operate with remote employees fairly easily these days.
- Don’t go big — The dream law firm may be downtown in a fancy building, but that’s not how small firms should start. As an attorney, all you need is space for work. Many big firms started in small spaces and grew over time.
- Prepare for lean times — The legal process is not quick. Cases can take a long time to complete, which means there can be long gaps of little to no revenue. These are times that law firms have to prepare for or else find themselves closing up shop quickly.
- Financial forecasting — It’s vital to keep tabs of what money is coming in and going out, but it’s also important to plan ahead. “If you’re doing your financial forecasting it will help you sleep well at night,” said Alvaro A. Arauz, founder of 3A Law Management. “Look at the past to see who owes you money, look at the immediate to see what’s owed now, and look at financial forecasting that’s coming in the next quarter or two quarters.”
There’s a big risk when starting up a small business, but with a big risk can come big rewards. If you have the skills, there is help out there to get you started.