Loans for Lawyers
Going out on your own as a lawyer comes with its own set of unique financial challenges. Courtroom trials can be extremely expensive and time-consuming, and lawyers must often wait for years to be compensated for their services. We’ll explore why attorney financing is critical to trial attorneys and lawsuit funding, and how loans for lawyers have evolved over the years.
Loans for Lawyers: The Rising Cost of Running a Law Practice
Being a solo trial attorney can put an enormous strain on cash flow. Depending on how their fees are structured – retainer, hourly, contingency, installment – these lawyers may end up self-financing litigation for months or years before getting paid. It can take up to two years before a civil case is brought to trial. And if a lawyer decides to work on contingency, they will only receive compensation beyond expenses if they win the case.
We often hear of lawsuits resulting awards of multimillion-dollar judgments. What we don’t hear much about are the expenses associated with a jury trial. Or the cases that cost millions and are unsuccessful. You don’t hear about how lawyers billing clients in installments delays their own compensation. All of these examples can cause severe cash flow issues for lawyers. This is why understanding your options for financing your law practice is so crucial.
Despite the rising costs of running a legal practice, lawyers have a comparatively high average annual income. The table below shows average income for attorneys (solo practitioner and small law firm attorneys who are practicing full-time) from billable hours in 2017.
Getting Started: Why Lawyers Need Financing
Even if you’re not fresh out of law school with a newly minted license to practice, you’re probably still going to be sitting on a small mountain of student loan debt for quite some time.
The American Bar Association (ABA) offers several articles and workshops for young attorneys who are just starting out in private practice, as well as for seasoned pros who are transitioning from a larger firm to their own new practice. You’ll be able to find some more information on what to expect as an attorney just opening a practice, and why financing your law practice is a key consideration.
Why Lawyers Need a Business Plan to Obtain Financing
The short answer is: Because it may be a while between starting your own Law Office Of and cashing your first client check.
The ABA urges lawyers who are planning on hanging their own shingle to create a business plan first. It’s not enough to just assume that you can light up the “open for business” sign and expect your practice to automatically thrive. You’ll need to calculate your anticipated costs of doing business. Not only will this be a guide for your own budgeting, but it will also serve as a key part of your business plan in case you need to pursue getting financing.
Some Common Expenses of a Law Practice
As part of your business plan, make a list of the most common law practice expenses you will anticipate incurring on a regular basis. Keep it simple; start with the essentials and then grow slowly. This is good advice for anyone starting their own business.
Law Office-Related Expenses.
You’ll need to practice somewhere. One of your best options is renting space from a larger law firm. You won’t bear the cost of carrying your own lease or mortgage, and you may be able to share common expenses like phone, internet, computer, fax, paper, etc. An additional benefit is that the larger firm might be in a position to give you referrals.
Many courts now use electronic filing systems, and just like before, you’ll incur various costs for various activities. Depending on your caseload and case activity, you could see thousands of dollars in charges in a day.
You’ll need some kind of client recordkeeping system, and if you’re going electronic, you’ll need a secure, cloud-based management system. You’ll also need backup and disaster recovery systems in place as well.
Relatedly, you’ll need a reliable accounting system. In case you’re looking for an all-in-one solution, there are 360-degree law practice software systems that manage everything from your clients, cases, and documents to your calendaring, time tracking, billing, and accounting.
You’ll also need to carry your own malpractice insurance as well. The table below shows that about 60% of solo and small law firm practitioners carry professional liability coverage.
Bar registration, CLEs, association dues, conferences and events, and all the other bills you pay to work as a lawyer.
Advertising and Marketing
So your clients can find you.
The State Bar of Michigan offers a good bare-bones law practice startup cash flow budget; some items may or may not apply to your situation.
Financing a Law Practice: Funding a Startup
The ABA and others recommend having 6 months (or more) cash in the bank when you first open your own law practice. If you plan on practicing as, say, a civil law trial attorney, you may want to have a longer runway, since civil cases can languish in court for years before you get paid. Different jurisdictions move at different paces. This would be a good moment to consider your financing options.
Traditional Bank Loans
Traditional banks are still the leading source of small business loans. Most businesses will find that they are able to secure some level of funding through the bank where they already conduct their banking.
In particular, the larger national banks usually have loan programs especially designed for legal professionals. Loan rates and terms will fluctuate considerably.
Bank terms are not generally as favorable as SBA-backed loans, but here is what you may expect from a bank loan:
Loan Amounts: $30,000 to $5 million
Repayment Term: Up to 10 years
Interest Rates: Starting at 7%
Time for Approval: Average 4 weeks
Business Line of Credit
A business line of credit is ready cash that you may draw upon up to a pre-set limit. Think of it as a hybrid between a business loan and a business credit card. Like a traditional loan, this unsecured line of credit provides financing that you can use for general business expenses. Like a credit card, there is no lump-sum disbursement; you borrow only what you need and pay interest only on what you borrow. Also like a credit card, payments are revolving. You can get a business line of credit through banks or alternative lenders.
A business line of credit can be an expensive proposition for marginal credit risk. However, if you have a strong credit profile you can negotiate rates and terms. The best advice is to shop around, as rates can fluctuate greatly.
Loan Amounts: $10,000 to $1 million
Repayment Term: 6 months to 5 years
Interest Rates: 7% to 25%
Time for Approval: As fast as one business day
Business or Personal Credit Cards
Business credit cards and personal credit cards are common sources of law practice funding. However, credit card interest rates tend to be very high and the credit limits tend to be smaller. Shopping for a credit card is relatively easy, as many small business and personal finance publishers produce lists of credit card companies’ rates, terms, and credit limits. If you have strong credit, this may be a good option.
Loan Amounts: $1,500 - $20,000
Repayment Term: Revolving
Interest Rates: Starting at 8%
Time for Approval: Immediate
Financing a Law Practice: Funding a Growing Firm
Once your practice has built some momentum and income, it’s time to consider expansion. That means reviewing your expenses and potentially adding new line items.
Personnel. By the time you have more cases in the pipeline, you will probably want to hire more people to work on them. At least a paralegal, maybe a new junior associate or 2. And have you been answering the phone yourself all this time? If so, that means it’s about time to hire an administrative assistant. You’ll need to think about salary, benefits, worker’s comp, payroll, overhead, and other costs here.
Advertising and Marketing. As you ramp up your practice, so should you ramp up your advertising and marketing efforts. You’ll have new services to offer – or more expansive versions of your services to date – and more capacity to handle caseload. Potential clients should know.
Let’s look at some of the more common lending options for law firms that are in their growth phase.
Small Business Administration (SBA) Loans
SBA loans are known across many industries as the most desirable loan type. They offer the most favorable rates and terms for borrowers seeking term loan financing. The SBA is not a direct lender; rather, it partners with qualified lenders, and provides guarantees against borrower default to those lenders. The SBA can guarantee up to 85% of a loan, allowing the bank or other lender to offer the borrower higher loan amounts on more favorable terms.
SBA loans are notoriously difficult to qualify for and require that the borrower submit a lot of extra paperwork. However, if you have an existing law practice with a history of success, and a pipeline of viable cases, you are a good candidate for an SBA loan.
When seeking a loan for a law firm, you will want to pay particularly close attention to the SBA 7(a) program. This program has features that align well with the needs of a legal practice, including its maximum loan amounts, repayment horizons, interest rates, and flexibility in use of funds.
What to expect:
Loan Amounts: $5,000 to $5 million
Repayment Term: 5 to 25 years
Interest Rates: Starting at 6.75%
Time for Approval: Approximately 6 weeks
Non-bank lenders such as Biz2Credit, Kabbage, and OnDeck provide business loans for lawyers on an accelerated approval basis. These lenders tend to have shorter approval cycles, lower credit standards, and less paperwork than the sources mentioned above.
However, attorneys should expect that there will likely be higher interest rates and fees associated with the convenience of quicker approvals and lower credit standards. If you require a fast solution to your law firm financing needs, an alternative lender or non-bank source may be the right solution. Be aware that non-bank lenders are not subject to the same regulations as banks; you should always read your loan documentation carefully before agreeing to the terms.
What to expect from non-bank lenders:
Loan Amounts: $2,500 to $250,000
Repayment Term: 3 to 18 months
Interest Rates: Starting at 10%
Time for Approval: As fast as one business day
Also known as litigation financing, lawsuit funding is a relatively new type of financing that is especially designed for firms litigating large civil lawsuits in anticipation of high-dollar jury verdicts. It is common for these cases to take years, and to carry very high costs from discovery to verdict. If your firm expands quickly, and you take on many of these sorts of cases, you’ll need working capital fast. Working with a lender that understands and appreciates the value of these cases is key. Lawsuit funding arrangements can be highly specialized. Terms and rates are almost always tailored to the specific instances and cases.
Loans for Lawyers: Summary
Generally speaking, most lenders consider lawyers seeking any kind of financing to be good risk clients. Even a relatively new lawyer. Since attorneys typically have higher than average income levels, lenders see them as likely to repay their debts.