Banks get skeptical right away when a representative of a law firm starts asking questions about a loan for the firm. That's particularly true with a personal injury firm.
Bankers just don't understand how a law firm might make a large sum of money in one month and then half of that in the next month and stay in business. That makes loan options for law firms costly with high interest rates. Even when a firm is incorporated, all partners will need to provide personal guarantees.
Here are options for attorneys seeking funding for their law practice.
Private Law Firm Lenders
Indeed there are private lenders out there that exclusively work with law firms and provide lines of credit or conventional loans. Their loans are based on open and existing case files, and the proceeds can be used for a wide range of expenses like taking on a new marketing campaign or financing expert testimony in a seven figure case. Online marketing for law firms can cost thousands each month, and experts can cost hundreds per hour.
For these types of loans, interest rates might be 20 percent or more.
Small Business Administration (SBA) Loans
Legal partners might not realize that law firms are eligible for SBA loans.
Remember when you got out of college? You wanted to go to law school, but you didn’t have the funds. You might have been able to get through law school with the help of a student loan. Most student loans are backed by the federal government, reducing risk to lenders. That's how SBA loans work too.
The Small Business Administration has been around since 1953 to support small businesses across America. One of the agency’s main purpose is to give small businesses increased access to capital.
Like your old student loan, the SBA itself doesn't lend money. You get the actual loan through a conventional lender. If your law firm is approved by the SBA, it guarantees the loan with your bank. That operates to make lenders far less apprehensive about loaning money to your law firm to fuel growth.
Types of SBA Loans for Law Firms
There are two types of SBA loans that most law firms consider. Those are the SBA 7a and SBA 504 loan programs.
The 7a program is the most popular of the two with a ceiling of $1.5 million. A loan of $150,000 or less carries an 85 percent guarantee and a two percent guarantee fee. Anything above that carries a 75 percent guarantee and a 3.75 percent guarantee fee.
One reason the program is so popular are the many ways funds from an SBA 7(a) loan can be used. For example, a law firm can use funds to consolidate high interest debt, for working capital or for a commercial real estate purchase or refinance. For additional details about SBA loan application process, review Why SBA Loans? and SBA Loan Requirements.
The 504 loan program has fixed rate terms of 10 and 20 years and up to $1.5 million for purposes of purchasing fixed assets like real estate and improvements to it. A personal guarantee is required on a 504 loan along with a pledge of collateral. From the SBA website:
504 loans are made available through Certified Development Companies (CDCs), SBA's community based partners for providing 504 Loans. A Certified Development Company (CDC) is a nonprofit corporation that promotes economic development within its community through 504 Loans.
CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.
SBA Express Loans
Express loans are one of the available options under the 7a program. So long as the interest rates don't exceed the maximum rates set by the SBA, they're negotiable.
Turnaround time for decisions on express loans is quick, and the SBA doesn't require lenders to take collateral on loans of less than $25,000. On loans between $25,000 and $350,000, banks are permitted to use their existing collateral rules.
No matter which SBA loan you apply for, be prepared with copies of all required documents that will supplement your SBA application.
If applying for the 7(a) program, SmartBiz Loans can expertly guide you through the application process. SmartBiz matches you with a lender most likely to fund, helping you to avoid going from bank to bank.
Want to find out where your business stands before you apply for a low cost loan? SmartBiz Advisor helps you learn how banks typically evaluate your business and recommends ways to increase your likelihood of approval when applying for the low-cost funding you deserve.
About the Author
Aaron Burdick is the proud owner of a Golden Retriever, is a crazy lover of pets of any size and kind. Passionate about life, he studies and writes about environmental changes, human rights and quality of life and much more. When he's not writing articles he's with his best friend playing fetch or cycling around the streets of Louisville.