Financing a law firm requires a significant chunk of capital, as any attorney well knows.
First, it’s essential to make sure all primary costs are covered. Are you going to be renting or sharing office space – or working out of your home? Do you have a practical desk and plenty of comfortable, inviting chairs for consultation? Filing space and filing tools?
Then, of course, there are your professional expenses. You need to cover licensing, all of your continuing legal education classes, insurance, and memberships. And of course, you need accounting software, timekeeping software, a good marketer, internet, access to a good legal research library…the list goes on.
And you know that that’s just the beginning.
Fortunately, the options for maintaining a steady cash flow are diverse enough to fit the needs of virtually any attorney.
1. Invest Your Own Money
This one sounds pretty straight forward, right?
Typically, self-investments are sustained by the financier’s own cold, hard cash. This money might have been resting in a savings account or a retirement account; it might have been accumulating behind a collection of antique brass statues that sold for a fortune; or maybe, it was a lucky investment that paid off.
While this type of financing sounds ideal — there’s no interest and no reason to deal with lenders or venture capitalists — there may be some downsides.
One huge disadvantage is the lost opportunity cost. Because you’ve invested all of your personal capital in one project, it’s literally impossible for you to put it anywhere else.
While investing your own capital in your law practice may remove the risk of paying late fees or interest fees, all other risks associated with your finances are in your hands and your hands alone.
2. Loan or Line of Credit
Loans and lines of credit (LOC) are two of the most common types of financing options. That’s probably because of the relatively simple concept:
- Apply for loan or line of credit
- If approved, receive capital (in a large chunk for a loan; in small chunks over time for a LOC)
- Pay back capital incrementally over time with interest
- Hopefully see a return by investing capital from loan
Loans and lines of credit work wonderfully, for people who can jump through all the hoops and barrels to get them! And for attorneys, the hoops and barrels are especially numerous.
One of the things that can trip up some attorney applicants is the required credit check. Lenders want to be repaid, and when lending the large amounts that attorneys or small business owners often request, these traditional lenders generally require very, very good credit. While I would not like to imply that attorneys have bad credit, they might not all have the perfect score that these lenders are asking for.
Another obstacle that lawyers may face when applying for a traditional loan or line of credit is the presence of collateral. Many loans or lines of credit are secured, meaning they require an exchange of assets – collateral – in order to finalize the loan. Attorneys often do not have the accepted collateral, and thus do not qualify for a loan or LOC. For example, a steady stream of assets such as many savings accounts, real estate, investments, high net worth collections, etc, might qualify as collateral — attorneys in small firms or solo practices often do not have these assets in abundance.
3. Fee Sharing
Fee sharing is essentially the practice of getting paid to be an incredible networker.
In a fee splitting arrangement, an attorney or other professional might refer a client to another attorney or other professional – for a price.
For example, if one attorney who does not handle bicycle accidents frequently encounters victims of bicycle accidents, he might refer those clients to another attorney who does handle such cases. For each case that this other attorney accepts, the referring attorney would receive some sort of payment, usually a percentage of the fee once collected. The more attorneys in this network and the greater the volume of referral leads, the better the payout.
It is very difficult to maintain a practice only from a series of fee sharing agreements. For one, it is exhausting to build up such a large network of referring attorneys. Plus, there is no guarantee that any one attorney will be able to find enough referable clients. Finally, fees for referring a client are nowhere near as great as the fees one can receive from successfully executing a case themselves.
4. Legal Funding
Legal funding is a form of financing specifically designed for those who work in the legal profession. .
Legal funding essentially allows attorneys to receive a large portion of capital — in some cases, a portion of their future fees – based on their legal receivables. Note that while banks and traditional lending institutions ask for physical collateral, legal funding firms accept a form of collateral specific to attorneys: an inventory of cases that are likely to yield a high return or that have already settled but are experiencing payment delays.
Legal funding eliminates the problem of lost opportunity cost that arises with self-financing, because attorneys can invest their settlement advance to grow their practice. Unlike with traditional loans or lines of credits, attorneys applying for legal funding will usually face fewer obstacles.
Furthermore, legal funding does not require attorneys to dedicate all of their energy to networking and referring clients. In fact, an attorney using legal funding doesn’t need to know anyone else aside from their clients and the legal finance firm!
Of course, because legal funding companies do take on a higher risk compared to traditional funders, the cost of an advance will likely be higher compared to what a bank would charge.
With so many options, financing your law firm doesn’t have to be difficult.
Those are only a few basic options for financing your law firm – as you can see, each option has its pros and cons. No matter what your circumstances are, there is a right solution for your law firm’s cash flow needs.
Photo Credit: Money Heap by Frits Ahlefeldt-Laurvig
Written by Joseph Genovesi, President of RD Legal Funding. Founded in 1998, RD Legal is one of the few companies that focuses exclusively on post-settlement funding. You can connect with Mr. Genovesi on LinkedIn, Twitter, and Google+.