Whether a law firm is just getting started or has been operating successfully for years, it is likely to face cash flow hurdles. Occasionally it is necessary to obtain financing to even out the ebb and flow of cases that settle and fees collected by the firm. Law firm financing can be a boon to those who are waiting on a large case portfolio and need to meet monthly operating expenses in the meantime.
It is possible to obtain financing from a variety of sources, but bank loans are not always the first option you should consider. Banks do not often have good insight into the operations of law firms, and they may not be well-positioned to assess a firm’s creditworthiness and their capacity to repay a loan on time and in full. They may require firm owners or partners to put up their personal collateral, such as their homes or retirement funds, to guarantee the loan. This can be unnecessarily risky, especially when there is a better option available for law firm financing.
Specialty lenders can approve law firms for loans based on a percentage of the fees to be collected from cases in the firm’s portfolio. That is, these lenders can assess a firm’s portfolio of work in progress and determine a reasonable loan amount for which the firm qualifies, given the amount of revenue the firm will collect once the cases are resolved. Not only can such lenders grasp the way that law firms operate and approve loans accordingly, but they can do it quickly enough that the firm can have cash in hand in time to meet monthly expenses or commit to taking on a new case.
Even an established firm can struggle with cash flow when they are waiting for a portfolio full of cases to resolve. The firm will not be able to collect fees until then, but the expenses of litigation require the firm to front their own cash in order to proceed. Law firm financing can be necessary for firms to clear those peaks and valleys in cash flow.
Likewise, because of the expenses of litigation, a firm may turn away potentially good cases simply because they do not have enough cash on hand to bear the associated costs. Financing from these specialty lenders can make it possible for firms to accept new cases when they otherwise could not.
While other sources of financing may be possible for a firm to obtain, it can be easiest and least personally risky to seek out a specialty lender who offers law firm financing. The influx of cash can really make a difference in the operations of nearly any firm.