April 5, 2023 By Suzanne Robertson

Law firms often operate with a unique business model based on client fees and case settlements that isn’t shared by many other businesses. Because of this, working capital needs sometimes creep in and access to the right financing may be imperative. 

The gold standard in small business loans is typically an SBA loan. SBA loans have low rates, long repayment terms, and low monthly payments.

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But sometimes, a line of credit (LOC) can support smaller, more immediate gaps in a law firm’s cash flow. Using funds from an LOC may help a firm cover costs and avoid drawing down on resources. 

Here are a few fast facts about business lines of credit and how they may help a law firm expand.

What is a line of credit (LOC)?

A business LOC is a revolving loan that lets you borrow the funds you need up to a certain limit. You only pay interest on the money you use — similar to how a credit card works. It’s “money on demand” and may be a flexible solution for attorneys in need of funds to cover operations. 

When is it useful to open an LOC?

Lines of credit may have some advantages over regular term business loans. There's generally a wide use of funds, there are no set monthly payments, and no interest is charged on the unused money. When you repay a borrowed amount, those funds are typically immediately available again.

How can funds from an LOC be used?

Each lender has unique guidelines so always be sure to confirm that your use of funds is approved. In general, most LOCs may be used in the following way to strengthen a law practice:

  • Hiring additional lawyers, paralegals, support staff, and contractors 
  • Financing marketing campaigns to help your firm stand out and attract new clients 
  • Making payroll 
  • Covering unforeseen expenses
  • Purchasing software or business equipment 
  • General working capital 

Tip: If you don’t need immediate funds, it may be worth opting for a small business loan with low rates and long terms like an SBA loan. It may be a good idea to speak with a financial professional to help you decide the best financing option for your circumstance. 

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What should you consider when opening a line of credit?

Business lines of credit may be ideal when you don’t know the exact costs of a certain project or if you need to cover ongoing operational expenses. They may also be used to fund almost any type of business expenses, like hiring staff, advertising, legal expenses, and more.

Tip: Another important benefit of a line of credit? It may help you build solid credit making you more attractive to lenders if you need low-cost funding in the future. Your credit report is usually the first thing considered by lenders.

How to qualify for a business line of credit

A business line of credit isn't like a term loan, but lenders consider similar information to qualify like your credit score, time in business, and revenue.

To qualify for a line of credit from $25,000 to $150,000 from a bank in the SmartBiz® network, you'll need at least two years in business and $100,000 in annual revenue. 

Although some lenders don't set a minimum credit score, borrowers typically need a score of 660 or higher to qualify.

A line of credit from a bank in the SmartBiz network has a 12-month term with interest-only monthly payments. Users may pay back and draw funds as needed. There is a 6% origination fee based on the approved line amount and there are no fees for subsequent draws on the line. 

Strategies to consider to help manage a line of credit 

1. Open a line of credit before it’s needed

Getting approved for a business line of credit with the best interest rates may take longer than expected. It’s typically a smart strategy to apply for one before you need the funds so your cash flow remains steady.

2. Limit how often you use the line of credit

An LOC is typically convenient. However, it’s best not to overuse it. LOCs are generally not intended to be used for years like other loan products. If you need a large amount of cash, an SBA loan with low rates, long terms, and low monthly payments is typically more cost effective.

3. Pay down quickly and leave open 

An LOC is less expensive than a credit card but is not intended to carry a balance for any length of time. They’re best used for short-term funding that may be paid off quickly, allowing the LOC to remain open most of the time for upcoming financial needs. 

In conclusion

If the time isn’t right to apply for an SBA loan, a line of credit typically offers access to fast cash and flexibility, as well as the opportunity to build your credit. 

If you’ve determined that an LOC is the right fit, learn more or apply today

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