The business world is challenging, especially when it comes to financing. Financing is the most common barrier to success in the business world, which is why around half of all businesses fail in the first year.
Unfortunately, starting a law firm is no different, and law firm financing can come with some unique challenges. Hopefully, we can help with that. Here’s what you need to know about acquiring law firm financing in 2023.
Law Firm Financing Options
First, let’s understand what we mean when we talk about law firm financing. This refers to capital infusions specific to law firms or private attorneys.
Moreover, the legal field uses this type of financing to cover litigation expenses, purchase office supplies, generate revenue, or simply grow the firm. Here are some of the most common financing options for lawyers opening their own practices.
Loans
Law firm loans are one of the most common ways to generate law firm financing. You’ll only need to pay back what you borrowed with a relatively low-interest rate.
However, banks are scrutinizing borrowers more with rising interest rates. If you don’t have the credit, revenue, or business plan to show for it, banks will likely turn you away.
If so, you can apply for loans through the Small Business Administration. They also offer business acquisition loans if you wish to acquire an existing legal practice. These options may make more financial sense in certain cases.
Lines of Credit
Opening revolving lines of credit is a great way to receive cash on demand, but there’s a limit. Not only are creditors keeping limits tight with today’s economic situation, but interest rates are quite high. To keep your firm’s credit in good health, you don’t want to over-extend your credit utilization, miss payments, or fall into a debt trap.
Still, this can be a great fit when you need short-term funding on a smaller scale.
Non-Recourse Capital
Non-recourse financing is a type of commercial lending in which the lender only receives repayment from the profits a law firm generates from a specific project or regular operations (depending on the terms). Essentially, lenders can’t claim any other assets or forms of repayment from the borrower outside of the contract terms.
Litigation Financing
Also known as disbursement funding, this is a great option if you only need limited funds for one specific case. The funds can help you cover any expenses incurred while defending your client, which you can then pay back after the case is complete. These costs can include but aren’t limited to; expert witnesses, court filing fees, attorney fees, and arbitration fees.
How to Get Financing For Your Law Firm
Now that you know some of the financing options for lawyers, there are still a few things you will need to acquire funding.
First, you will need to calculate your assets. Collateral can help increase the amount of funding you can acquire from lenders. This includes bank accounts, company vehicles, properties, and more.
From there, here’s what you’ll need!
Calculate Expenses
If you already have statements of expenses, acquire proof of your law firm expenses right away. From there, make sure you have them available.
Otherwise, calculate your expected purchases for the coming months. Generally, lenders will want six months of estimated expenses in advance.
There are essential expenses in every legal firm. These include marketing law services, legal recruiting, rent for your office space, and more. Make sure you account for all of the essentials, as well as anything relevant to your specific law firm.
Draft a Business Plan
It’s challenging enough to secure loans in these uncertain economic times. Without a business plan, it’s nearly impossible.
This is especially true for new or aspiring firms. An established firm with secure revenue streams may only need to show proof of its expenses and revenue. However, a newer firm will need to demonstrate a clear financial plan to investors or lenders.
If the funding you need can come from a line of credit, it’s unlikely that a creditor will ask for your business plan. Still, most creditors are withholding high lines of credit at the moment, so it’s best to keep your options open.
Moreover, this business plan should include your firm’s:
- Mission statement and core values
- Company description
- Geographic location and areas served
- Industry description
- Target audience
- Competitor analysis
- Projections
- Services offered and pricing
- Marketing strategy
- Existing financial information
Yes, that’s a lot, but every business needs a plan, and law firms are no different. Even if you decide not to pursue funding that requires a plan, it’s still best to have one.
Generate Revenue
The more you can purchase with cash, the better. There’s no comparison, especially with rising interest rates in 2023.
Consequently, establishing a plan to begin generating revenue as soon as possible is essential for your business plan. Loans and investments will run out. Give yourself as much room as possible by generating revenue early on.
Also, it may be necessary to prove that you have revenue when applying for loans. Many lenders will not take the risk without existing assets or revenue.
Get the Funding You Need
Now that you know the basics of law firm financing, get the financial help you need and open your practice as soon as possible. Starting or acquiring a business isn’t easy, but if you lay the groundwork and start off on the right footing, the sky is the limit.
Get your finances in order today and keep reading our blog for our latest financial tips!
