Loans for Lawyers – A Practical Guide to Financing a Law Practice
So want to start your own law practice? That means financing your own law practice. Here’s everything you need to consider in order to achieve Success, Success & Success, Esq.
Do Not Rush Into Financing
There are plenty of options to consider when you decide how much you need to finance. Some of these options take more time than others, so you need to be patient and not limit your options by taking the quickest offer. Some options, like an SBA loan, can sometimes take months to complete and secure funding. Other options may be quicker, but there may be higher costs associated with the process being expedited.
That being said, according to Marc Baehre, a partner and founder at Katz and Baehre Law, a good frame of reference would be to give yourself 6 to 8 months lead time in securing your financing. A good piece of advice would be to speak with an accountant or a financial planner to help you sift through competing loan offers. With a sound business plan in place, you will avoid borrowing too much capital. When opening either a sole ownership or small law firm, you want to save as much as possible when you start up, especially if you are securing outside financing.
Baehre added that you should consider yourself as part of that capital. “When we started our firm, in addition to knowing we found a niche that could be successful, we also found ways to market and advertise that didn’t impact our budget. We would run free seminars on estate planning for anyone or any group that would listen, It cost nothing except time.”
According to Baehre, a pitfall of many new law firms is that they overspend on initial advertising and overhead. While you want to project a professional image, most clients know that overhead is built into what they pay. “If they see you with a Kittinger desk, they know they are paying for it!” said Baehre.
What Do You Need the Money For?
You need a solid business plan in place as you set out starting a firm or a sole proprietorship. With a solid plan in place, you will not only set the organization up for success, but more importantly, you will have a solid idea of how much financing you will need.
You’ll need to consider rental cost vs. mortgage costs, office supplies and furniture, staffing, advertising, and your own planned compensation. Many of your start-up costs will be one-time expenses, or at least expenses that only occur once in the first few years. However, you also need to account for industry-specific recurring expenses. Bar association dues, CLE costs, website management, and staffing are typical recurring expenses a law firm faces, with staffing usually the largest recurring expense.
“Your goal should be to borrow as little as possible,” added Baehre, “These types of costs can easily be factored in so there are no surprises.” McGuide added, “You always want to borrow for exactly what you need, but planning for that can be difficult if you are going into criminal defending because in reality, you may end up bartering with clients instead of getting paid in money.”
Rent vs. Own
Although it should be part of your business plan, deciding on your location is a crucial component to not only deciding how much money you will need, but also in the long-term success of your business.
There are pros and cons to both leasing and purchasing, so you need to do your due diligence in researching which will be best for your firm. How long do you want to be in an area? If it is short-term, then leasing might be your best bet. If you have narrowed down a location that you think works for a long period of time, then ownership may work for your firm.
Two positive aspects of leasing are that your payments each month are tax-deductible and you don’t require a large amount of money upfront, usually just a deposit and first month’s payment.
On the ownership side, you build equity while you can deduct the interest and it also gives you the option to lease space within the building as an additional source of income. It is not a bad idea to look at the real estate market or talk to an agent about realistic locations and choices.
“We look at the real estate market in WNY when we opened and renting was a much better option. We were able to save money by sharing an office space with a financial planner, which tied into our field of estate planning and it also made sense for us because becoming an owner and possibly a landlord was not what we wanted. It is a viable option if you want to build your business that way, but it didn’t work for us,” said Mark Baehre, a partner at Katz and Baehre Law in Clarence, NY.
“In Florida, the market is a little more volatile, so I knew that by owning, if it was necessary, I could rent out additional space in my building to guarantee cash flow. In fact, my location was also good for leasing as a combined commercial and residential property, which came in handy when the real estate market dropped in the early 2000s,” added McGuire.
Looking At Your Funding Sources
Once you have a solidified business plan, you can begin to look at your financing options. Here are some loans that startup firms and/or expansions.
- SBA Loans. There are three different types, Micro, 7(a) and 504 Loans. These federally backed loans fund from $5,000 to $5 million. They have similar interest and payback rates and often come with lower interest rates. The SBA program gives borrowers the opportunity to borrow higher amounts than the other options.
- Business Line of Credit. Credit lines rage from $1,000 – $1 million. They are good for helping with cash flow. Attorneys often have periods of low cash flow which makes a business line of credit a viable solution.
- Unsecured Business Loan. Usually available up to $100,000, depending on the borrower’s personal credit situation. This is an option if you have excellent personal credit and don’t have or want to use assets as collateral.
- Merchant Cash Advance. If you are established and you accept credit cards as a type of payment, this is a lump sum loan that can be borrowed and paid back with future credit card sales. It is technically not a loan per se, but a lump sum of cash that you get in exchange for a percentage of your future sales. This type of program has very little regulation, so you have to be cautious with the offers you entertain.
“As an attorney, you have a lot of options when try to start your own firm,” McGuire concluded. “I like saying the old phrase, ‘When you need money, no one will lend it to you, and when you have money, everyone wants to lend it to you.’ That being said, you always want to make sure your personal finances and credit are in good order before you begin the process of looking for funding. You want to give yourself the best possible chance to secure the funding that will work for you.”