Precious few law firms are launched without some form of credit. Even established law firms need financing when they’re scaling up their services to accommodate hard-won growth.
What are your options?
That’s what we’re going to look at today, as well as how to choose the best option to maintain an even financial keel.
Traditional Loan Options
The world would be a better place without some outdated traditions, but traditional loans still have pride of place in financing. Shop around until you find a financial services provider that offers competitive interest rates and affordable long-term repayment plans.
Another option is an SBA loan. The US Small Business Administration provides small businesses, like up-and-coming law firms, with affordable financing that has favorable terms and lower down payments.
However, there are provisos.
You must meet strict eligibility criteria that includes reams of supporting documentation to prove you qualify for a loan. You have to put up collateral, like property or assets. You need to be very sure that you can meet payment conditions, otherwise repo guys could come along for your TV and fully stocked bar fridge.
Basically, SBA loans are best for established law firms that are scaling up and not brand-new, high-risk ventures.
Equity Financing
Do you like to gamble – conservatively? Equity financing could be an option. You sell a portion of your firm’s ownership to investors who provide the capital needed for growth. It has several benefits. Unlike traditional loans, there are no repayment terms and conditions. The new capital is invested into the firm, which is used to fund your growth strategy.
There are also a couple of risks. You relinquish total control of your firm, or, if you still retain the majority share, you dilute your revenue because each new investor gets their piece of the pie.
It remains a good option for established law firms that are on an upward trajectory but prefer to avoid the legal obligations of traditional loans. They’re also good for firms that have limited access to loans; the ones with high growth potential but are too high risk for traditional financial services providers.
Alternative Financing Options
Traditional is not your thing and you don’t like to take a poke gambling and tempt fate. Your next option is the Alternative Financing Route. There are three broad types.
1) Revenue-based: Repayment rates are based on future firm revenues. This is great for established law firms, but risky for new firms that are still building a strong customer base.
2) Business lines of credit: Sort of like traditional business loans, but different. You receive a revolving credit line that enables you to stretch your flexible financial management muscles.
3) Private loans from investors: This is not the same as equity financing. You are borrowing money that you will pay back over a set term. This must be a legal contract that’s clear about repayment conditions, especially if you fall behind. You don’t want to discover that your investor is now the proud owner for 25% of your business.
Specialist Financing for Law Firms
You know how special law is, otherwise, you wouldn’t practice it. It makes sense to look for specialist law firm lenders. They know your needs. They know your needs are unique and they know they can help you meet those needs.
It’s a bit like having older siblings who’ve already exposed your parents to teenage hell. They’ve been around the block and are prepared for anything you throw at them.
Their experience is comforting, their loans are generous, and they’re a little more flexible regarding payments than other loan providers. This is because they recognize value when they see it and are keen to give you a hand up.
However, don’t be surprised if their interest rates are higher than you expected. They provide virtually bespoke services with industry-specific support. Whatever they charge, it’s cheap at the price.
Key Factors to Consider When Choosing a Financing Option
Picking one financing option out of the array available is one of the most important decisions you’ll make for your law firm. Eeny meeny miny moe won’t cut it. Neither will pin the tail on the donkey, throwing darts, and drawing names out of a hat.
Instead, we suggest you do the following:
- Use Sage accounting software to good use and conduct an honest assessment of your current and future cash flow needs.
- Think carefully about how much control, if any, you’re willing to relinquish.
- Be clear about your short- and long-term goals because the financing option you choose must enable you to reach those goals.
- Consider your current creditworthiness and, again, be realistic in your ability to meet the repayment terms.
- List the pros and cons of each option, including the answers above, and decide if you can live with the balance.
Financing Isn’t Child’s Play
Your law firm is like your baby, you want to nurture it, nourish it, and give it wings to fly. Choosing the wrong financing option could do exactly the opposite. Be a responsible parent and conduct a thorough assessment of your financial health so you can get funding that helps you go from strength to strength.
