Law Firm Financing Options
Taking the first steps to start your new law firm or the next step to expand is an exciting time, but also a nervewracking one. You’ll need a big infusion of cash that you either don’t have or don’t want to spend.
Thankfully, there are law firm financing options to help you take the next step. You can borrow the money you need to buy or rent office space, to bring on a new hire, or cover costs of other expenses. Many of the legal loans available to you are similar to those of most small businesses. However, there are also financing options specifically available for law firms that you should know about. Below, we’ll guide you through the different options and help you find the best law loans for your business.
The Best Law Firm Financing Options
There are several options available to you for law firm financing. This includes the more traditional loans, for example, SBA loans and short- and medium-term business loans, as well as litigation-based financing.
The amount you will be able to borrow for your law firm will depend largely on your credit score, and that of your business, as well as what assets you have if you are required to have collateral to secure the loan (if your loan requires it).
The most appropriate legal finance loan for you will usually depend on your specific needs and the terms of the loan, but here are the few best law firm financing options available today.
SBA Loans for Law Firm Financing
SBA loans for law firms is the most popular option for obtaining financing. These are loans guaranteed by the Small Business Administration and provide small business owners with relatively large loan amounts they wouldn’t be able to get alone. Although SBA loans are the most desirable loan option, they are particularly hard to obtain as they have a long list of requirements that must be met, and take time to process. (Typically 2 weeks to 2 months.)
|Loan Amount:||$30,000 – $350,000|
|APR Range:||9.7% – 11.04%|
|Time To Fund:||Typically take several weeks to fund, but can fund as quickly as within seven days.|
|Loan Term:||Maximum loan term is 10 years.|
|How To Qualify:||675+ Personal credit score
$50,000+ Annual revenue
|Great Option For:||Borrowers with good credit
Funding real estate purchases
|Credit Check?||Soft credit check and hard pull|
|Co-Applicants Accepted?||No cosigners|
|Direct Pay-Off To Creditors?||No|
|Click “Check Rates” to apply to SmartBiz|
Do Law Firms Qualify for SBA Loans?
Yes, but there are several SBA loans available, the most appropriate of which for legal financing is an SBA 7(a) loan.
This loan allows you to borrow sums up to $250,000 for whatever expense or expenses you have in mind. One big advantage of SBA loans is that they have particularly low interest rates, and have much longer repayment terms than other legal finance loans available.
Unfortunately, SBA loans are hard to qualify for. You will need to have a personal credit score above 680, to have been in business for at least two years, and have solid business plans and projections. On top of all this, the application process takes a long time to complete.
An SBA loan is perfect if you qualify, and it should be your first choice for law firm financing, but it is not an option if you need cash fast.
Short- and Medium-Term Loans For Law Firm Financing
Another law firm financing option available to you is a short- or medium-term loan.
This is a great choice if you need or want the money as soon as possible. There are even term loans that only take 2 hours – 2 days for approval and to receive your funds.
Better still, you do not always need a particularly good credit score to qualify. In some cases, you will still be able to qualify even with a personal credit score as low as 550.
These loans are often straightforward to apply for, though do your research when applying, as some term loans will need more information from you than others.
You should also note that short-term loans are more expensive than other loans available, as their interest rates are typically much higher. Short-term loans generally have interest rates starting at around 10% and go up significantly from there. These loans often have a term of 3-18 months, and take the money from your bank account on a daily or weekly basis. Short-term loans can be useful, especially for unexpected expenses, but do your research and don’t apply out of desperation.
Law Firm Line of Credit Options (Business Line of Credit)
If you are looking for flexible long-term financing, instead of a lump-sum deposit, look into getting a Business Line of Credit.
A business line of credit works much like a business credit card, except you only pay interest on the money you actually borrow, no matter the full credit amount. So, for example, if you took out a $10,000 term loan, you would pay interest on the full amount for the duration of the loan, even if $9,000 of it sits in a bank account.
With a business line of credit, you may have a maximum credit amount of $10,000, but if you only borrow $1,000, you will only pay interest on that $1,000, not the full credit amount.
Another benefit of this method of borrowing is that once you pay back the money you have used, you can use that money again and again for as long as you have the business line of credit.
This is a better option for established law firms that need flexible financing to cover occasional expenses, such as paying staff when waiting for a large invoice to be paid.
There are 2 types of lines of credit available as law firm financing:
Asset-Based Lines of Credit
An asset-based line of credit is where existing assets are used as collateral. This may include real estate, equipment, vehicles, money owed by clients, among others. Lenders will provide this type of financing as a revolving loan (described above) or a term loan.
Unsecured Lines of Credit
An unsecured line of credit does not have this collateral requirement to back the loan. Although this will mean there is more risk to the lender, if you can show evidence of a healthy financial situation and have a great credit score, you will be accepted for this type of credit.
Litigation-Based Law Firm Financing
There is one type of financing option unique to law firms, known as litigation-based financing. This is where a lender will allow you to borrow money based on upcoming settlements or court case wins.
You, as the borrower, will receive an advance on the amount you hope to win from a client’s case, and then you are required to pay back the loan depending on the total amount you win.
There will be some lenders that call for your loan to be repaid whether you win your case or not, and other lenders will not charge any interest unless you lose your case. Therefore, if you do lose your case, you can pay back interest-only until you find enough to pay back the full loan amount, depending on the terms of your financing.
Bearing this in mind, you should be absolutely confident that you will win your case, or will get your desired settlement before you take on litigation-based law firm financing. For successful firms, however, this can be an effective way to cover expenses for a big case.
Law Firm Startup Financing Options
We’ve covered the best options for law firm financing above. As a startup, you may find it more difficult to find a lender who is willing to lend to you, so save up as much as your own funds as possible. Remember that the lower your debts when you start, the easier and faster it will be to get into profit.
The best loans to look at for a new business will likely be an SBA loan through a lender that will consider startups, or term loans, as they will look at your personal credit score and business plan to decide whether you’re a good person to lend to.
How much does it cost to start a law firm?
Costs vary significantly depending on where you live. For example, starting up a law firm in Manhattan will have higher expenses than one in a city with a lower cost of living. Fortunately, it is possible to bootstrap the launch of your law firm, and if it is just you and a partner or a small team, office costs don’t need to be expensive.
You should save $5,000 to $25,000, depending on where you are, what equipment and office space you need to start, and the wages of anyone involved. Also consider if you will need to market for your first clients, or if you have clients coming with you from your current firm.
Before taking on any sort of law firm financing, ensure that you are aware of exactly what you need and what your viable options are to suit those needs. Make sure that you take the time to compare different loans and lenders as they will all come with varying requirements, terms, interest rates, and added fees. When you’re ready to compare, we’re here to help.