Law Firm Financing Explained: Everything You Need To Know To Get The Right Funding
Explore SBA loans for law firms, startup grants, and other available funding options, and find out how you can leverage this working capital to better serve your clients.
With courts closed or otherwise working under capacity in recent times, law firms may find themselves in need of supplemental sources of funding. While attorneys share much in common with other businesses, loan financing for law firms can be surprisingly challenging to acquire.
This article covers what law firm financing is and where lawyers can look for it.
Table of Contents
- What Is Law Firm Finance?
- What Are The Benefits Of Law Firm Financing?
- How Much Working Capital Does A Law Firm Need?
- What Types Of Business Loans Are Best For Law Firms?
- How Do You Get The Money To Start A Law Firm?
- FAQs About Law Firm Financing
- How Can Law Firm Financing Help Grow Your Legal Practice?
- Choosing The Right Funding For Your Law Firm
What Is Law Firm Finance?
Law firm finance is any form of external funding used to pay for a law practice’s operations.
Law firm financing can take a number of different forms, but in most cases, it will be a loan of some kind. Due to the nature of law practices, many alternative lenders do not lend to law firms. Because of this, it may be necessary for law firms to track down lenders who specialize in funding legal practices.
What Are The Benefits Of Law Firm Financing?
Law firm financing can be used to cover a variety of expenses, including but not limited to litigation expenses, smoothing out cash flow, paying for legal research services, operational costs, office equipment, and expansions.
How External Funding Can Help Your Law Firm Grow
Let’s take a close look at some of the ways law firm financing can be used.
- Improve Cash Flow: Businesses with a feast-or-famine cash flow can use business loans to access capital when they need it.
- Marketing & Advertising: Law firms rarely have their market cornered. Financing can be used to buy attention-grabbing spots in various media.
- Practice Management Software: Financing can be used to buy or lease office tools, equipment, or software.
- Hiring Legal Talent & Paralegals: Law firm loans can be used for payroll and contractor expenses.
- Updating Your Law Firm’s Website: Clients might have reservations about hiring counsel with a website that looks like it could have been hosted on Geocities. Funds from law firm financing can be used to fix that.
- Facilitating Remote Workers: Setting up a remote workforce can bring unexpected costs. Financing can help close the gaps.
- Operational Cost & Overhead: These are common business expenses, such as utilities and rent that law firm financing can pay for.
How Law Firm Financing Also Helps Your Clients
Law firm financing can also benefit your clients.
- Cover Litigation Expenses: Costs of cases may be higher than initially anticipated and can be covered with financing.
- Post-Settlement Funding: It can take months to get cash from a settlement. Post-settlement funding can cover the gap.
- Expand Services: Financing can be used to expand the services available to your clients.
- Alternative Fee Arrangements: Alternative fee arrangements can give your clients more ways to pay and can be enabled through law firm financing.
- Acquire Top Expert Witnesses: Expertise can come with a hefty price tag. Law firm financing can help pay for it.
- Legal Research Services: The case may call for additional research services, which can be financed.
How Much Working Capital Does A Law Firm Need?
The amount of working capital a law firm needs can vary greatly between practices. A common way to approach the issue is to determine your working capital ratio. It looks like this:
Working Capital Ratio = Current Assets / Current Liabilities
A healthy ratio is somewhere between 1.2 and 2. If your ratio is lower, you may not be able to handle unexpected expenses. If it’s higher, you may not be reinvesting your capital effectively.
What Types Of Business Loans Are Best For Law Firms?
Law firm financing can come in a number of different forms. Some forms of financing may be tailored specifically to law firms, while other types apply to businesses broadly. The financing best suited to your business may vary depending on your credit score, how long you’ve been in business, your annual revenue, and additional factors.
How Do You Get The Money To Start A Law Firm?
Entrepreneurs, including those wanting to start law firms, face a frustrating Catch-22. They need money to get the business up and running, but most business lenders will only work with businesses that have been in operation for a certain amount of time (at least six months for alternative lenders and at least two years for many traditional institutions).
For a look at how you can go about financing your new law firm, check out our feature on how to Finance Your Startup With One Of These 23 Smart Fundraising Options.
Law Firm Startup Grants
Another option is to look for grants that are aimed at law firms. Unlike the other types of financing we’ve covered, grants are free money. Unfortunately, that means you’ll likely face a lot of competition in securing one. You can maximize your chances of getting a grant by carefully selecting ones aligned with your business and taking the time to make a compelling pitch when you apply for one.
Grants can be federal, state, local, or private in origin. Many grants for lawyers are focused on supporting pro bono work.
Some places to look for grants include:
- The Legal Services Corporation (LSC): This organization is focused on funding legal aid for low-income Americans. Qualifying organizations will find several grant programs aimed at furthering this mission.
- Impact Fund: This organization funds grants to legal organizations doing nonprofit work related to social justice, environmental justice, or economic justice.
- Alliance Defending Freedom: This organization offers grants and funding to attorneys working on cases with conservative causes.
For more information on finding grants, check out our feature on How To Find Federal, State, & Local Government Small Business Grants.
FAQs About Law Firm Financing
How Can Law Firm Financing Help Grow Your Legal Practice?
Law firm financing can help law firms deal with the challenges of having a business with cyclical income. Financing can put money into the hands of the law firms when they need it, whether it’s to pay for critical services to clients or for more mundane business needs, such as growing their practice.
Choosing The Right Funding For Your Law Firm
With the funding sources we’ve covered, most law firms waiting for cash to hit their accounts after settling a big case shouldn’t have to worry about keeping the lights on. Remember that financing is a toolbox, with each tool optimized for a different task. Depending on where you’re at in your business cycle, one form of law firm funding may be a better fit than another.
It also never hurts to keep better track of your finances so that you’ll know when you need an infusion of capital. To that end, check out our Invoicing Software Comparison and Accounting Software Comparison charts.