Updated: Dec 27, 2018
Starting your own law practice is an exciting new journey for any lawyer. Whether you’re fresh out of law school or you’ve put in time at a larger firm, the idea of going solo and becoming your own boss is likely the realization of a lifelong dream. Plus, owning your own law practice means you can focus on the cases you want and help your clients while building your personal reputation in the field.
Figuring out how to finance a law practice can be a little more challenging, however. Depending on where and how you plan to open up shop, you can expect to spend anywhere between $5,000 to $15,000 just to get your office ready for clients. And that’s not including the recurring fees you’ll encounter for software or equipment, or future expansion plans down the line.
Even though it might take a fair amount of capital to finance your law practice, you’re in luck. Since there tends to be a fair amount of money to be made in law, lenders might be more likely to work with you to help you get the financing you need. Here are some of your best options for law practice financing, depending on your plans and objectives.
The U.S. Small Business Administration offers several loan guarantee programs, more commonly known as SBA loans. SBA loans help small business owners and entrepreneurs access financing for a variety of projects, including general business financing and more specific objectives, like buying real estate. The SBA partners with local intermediary lenders, typically traditional banks and credit unions, and guarantees up to 85% of the loan’s total. This leads to more approvals for small business owners for loans that they would otherwise be less likely to get on their own. This guarantee also lets banks provide loans at lower interest rates and with less risk of not being repaid.
The SBA 7(a) loan is a great option for law firm financing. 7(a) loans can be used for a wide number of objectives — including the purchase of furniture, supplies, materials, or even an existing business. You can also use a 7(a) loan to expand your practice, or for any other business purpose you can think of (within reason). The SBA 7(a) program is great because of its level of flexibility. Plus, it comes with long repayment terms and low interest rates. However, if you need your money quickly, or do not have time to put together the extensive application required for SBA loans, you may want to consider another financing option.
Here’s what you can expect from SBA 7(a) loans:
While SBA loans are a great option, they can be difficult to come by for some small business owners. The application process is often lengthy and requires what can feel like endless docs. If you don’t have the time for the lengthy application process it entails, your next best bet might be a conventional bank loan. You most likely won’t get the same great interest rate or lengthy repayment terms that come with an SBA loan, but you’ll still get some of the most competitive ones on the market.
Some small business owners have a hard time qualifying for a bank loan, but the path is typically a bit easier for esquires. Since law is a lucrative industry, and lawyers tend to draw a large salary, banks are typically more willing to take a risk on financing a new law practice. Your odds of paying back the loan are higher than other business types since you’ll command a higher fee for your services. Plus, your business overhead is smaller than other industries such as manufacturing, which means you’re likely to have more liquidity to put toward loan repayments. As a bonus, bank loans usually take less time to get approved than SBA loans, which means you can access cash quicker.
Here’s what you need to know about bank loans:
Even though law practices tend to have high revenues, which lenders like to see, there are still situations in which a regular bank loan may not be right for you. For example, you might need money faster than the typical two to six week approval timeline. If this is the case for you, consider short-term loans to help cover the costs involved in building your law practice.
Short-term loans are usually more expensive than other options — they typically come with double-digit interest rates and require daily or weekly repayments — but can help you get money quickly and easily. Most loans are approved in a day, and only require about 20 minutes’ worth of your time to complete an application. If you’re experiencing capital problems that need a quick resolution, or don’t have the kind of credit history that makes you a prime bank loan candidate, a short-term loan can be a great option.
Here’s the lowdown on short-term loans:
Medium-term options are a fantastic middle ground between SBA or bank term loans and short-term loans. This option provides loans with competitive interest rates for a wide range of loan amounts, typically starting at just below 5% and offering anywhere from $25,000 to $500,000. Unlike short-term loans, medium-term loans can be repaid over six months, or even up to five years — simply choose a term that works best for your business. You can still get a decision on these loans quickly, similar to a short-term loan: in fact, you may be able to get a decision just 24 hours after document submission.
Here’s what you need to know about medium-term loans:
A business line of credit isn’t the same kind of loan as the other options we’ve covered, but it’s a great option for law practice owners who need additional cash from time to time. A line of credit lets borrowers pull from a set amount of cash, only taking what they need when they need it. You’ll only pay interest on the money you borrow and can pull smaller amounts than the line of credit’s limit in case you don’t need all of the loan’s total at once. Plus, you can draw from the line of credit as often as you need for as long as the loan’s terms allow.
Think of a business line of credit as being similar to a credit card, except with lower interest rates and — in most cases — a higher credit limit. You can use a line of credit to buy equipment, supplies, or pay for unexpected fees as you build your business, among other items. This can be a great alternative to running high credit card balances or taking out short-term loans. That said, it’s important to note that lines of credit often come more fees than term loans and typically offer lower borrowing limits.
Here’s what to know about business lines of credit:
There’s one additional funding source that’s unique to the law industry. These loans allow you to borrow money against pending verdicts and settlements. For example, Amicus Capital and Advanced Legal Capital offer loans to lawyers who expect to win an upcoming case, or reach a settlement that provides the money required to repay the money borrowed.
Amicus Capital determines how much money applicants can borrow based on their current caseload, and the estimated amount of money they expect to earn if they win the cases they’re working on. Depending on the loan, some companies require you to pay back the funds even if you don’t win the case (while others don’t get repaid if your case is unsuccessful). Before you consider lawsuit funding, pay attention to the hidden fees and be sure whether you feel confident that you can win the case before you accept this type of funding.
No matter which law practice financing option you choose, your first step should be making sure you understand of your options. Each of the loans we discussed above come with certain benefits and drawbacks depending on how you plan to use the cash. Knowing what you need, how quickly you need it, and what you can afford over the long run should all factor into your final decision. In this case, discovery isn’t just something that only happens during a trial.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.