By Elizabeth Pekin, Esq., Momentum Funding Founder & President
When it comes to law firm lending, navigating the options are varied and complicated. Banks often do not understand the structure of your contingency law firms. The existing options for law firm lending are often very expensive. I have spoken to many attorneys who cannot obtain financing or have expensive financing and have nowhere to turn to repay their mounting debt.
The expenses of marketing your firm to obtain business and the competitive nature of the Personal Injury industry makes it difficult for a sole practitioner or small law firm to compete in the market of huge billboards, constant TV advertisements, and the new offices many law firms are building or renting to highlight their firm’s success.
There are several different types of options for law firms when it comes to funding. Here are some of the different types and how to navigate what might be the best step for your firm:
Bank Loan – Most banks do not understand the contingency fee based practice or that cases are significant collateral for the loans. Also, the amount you can borrow from a bank is related to your personal assets. Therefore, most law firms fail to qualify for traditional lending options. Even if your firm qualifies for a bank loan the owners will need to personally guarantee the loan.
Law Firm Lending Companies – These businesses review the cases in your office and will offer loans using case portfolios or the total value of the anticipated fees as the collateral. These loans are based on case inventory and can be used for case expenses like depositions, experts, advertising and other business expenses. They can be done with lines of credit or presented in a traditional loan agreement. This money can be used for all law firm expenses including case costs, advertising, hiring employees and other business expenses. Also, the monthly fees are often tax deductible. The downside of this type of loan is that the loans are expensive. I have met with many firms who have been turned upside down financially while repaying these costly loans. The upside of this type of lending is that the money can be loaned in a timely fashion. However, the attorney often does not have to give a personal guarantee.
When law firms win big awards, they like to get paid. Immediately. But that’s often not what actually happens. For many reasons, the firm does not receive the funds for months and the delay can hurt a law firm and make it harder to grow and move on to the next big case.
Small Business Association (SBA) Loans – A new and fresh option for firms to help subsidize their law firms or for a law firm to buy a building are SBA loans. This can be a good option for an attorney or firm who wants an inexpensive lending option. The U.S. Small Business Administration (SBA) was created in 1953 to aid, counsel, assist and protect the interests of small businesses.
Providing alternatives to traditional lending products,the SBA programs helps small businesses grow by offering longer amortizations, lower equity contributions and flexible terms. Law firms qualify under the SBA as a small business and these types of loans could be good options for attorneys.
There are two types of SBA Loans that attorneys can qualify for. One is a 7(a) loan which is money that can be obtained for general business expenses. A 7(a) loan can be used to buy out debt and help the attorney consolidate his or her finances. Financing for working capital, inventory, debt consolidation or refinancing are eligible through the SBA 7(a) Loan Guaranty Program.The requirements of eligibility for SBA loans are based on specific aspects of the business and its principals. As such, the key factors of eligibility are based on what the business does to receive its income, the character of its ownership and where the business operates.
These loans are relatively inexpensive compared to other options. The downside to this type of financing is that the process is lengthy, a personal guarantee is required and the money is dependent on government approval which can take months to acquire.
The SBA also offers financing for law firms to buy buildings at low rates through a 504 Loan. A 504 loan may be used to purchase fixed assets such as: land and improvements, including owner-occupied buildings, grading, parking lots and landscaping; construction of new facilities, or to modernize, renovate or convert existing facilities; This loan is usually for a 10-year term at a fixed or variable rate, depending on the relationship with the lender.
The low 10 percent down payment is the big attraction of this program. A law firm will realize upfront cash savings of approximately $100,000 on a $1 million project.
The maximum SBA loan can be up to $2 million.
Funds that are advanced after a law firm wins a trial verdict – This creates a common problem for many attorneys. There is a verdict. Yet, the funds are being held up by an appeal. A law firm loan company can assist at this point by providing the money to the firm so that the firm can keep operating while awaiting its fee from the case.
What type of loan should you apply for?
I will guide you through the complications of the various options. After a quick phone call to review your financial need, the amount of financing you are looking for, and a discussion about what you will use the money for, I will then match you with the best possible solution for you and your firm.
If you are interested in more information, simply call Momentum Funding Founder & President Elizabeth Pekin, Esq. at 855-855-FUND (3863).