Business Loans for Lawyers: What You Need to Know

If you’re starting or growing a law practice, you may be considering a business loan designed for attorneys. A business loan can help you kickstart your law practice by covering start-up costs and allowing you to focus on obtaining clients. Unlike personal loans and high-interest credit cards, business loans are uniquely designed to meet the needs of a business entity.

There are a variety of loans for lawyers available, and all have their advantages and disadvantages. Before deciding how you’d like to finance your firm, consider the many different types of law firm loans help you develop your business plan and better serve your clients.

Don’t know where to start? Don’t sweat it. In this article, we cover everything you need to know about business loans for lawyers.

Why Lawyers Need Loans

Running a law firm or solo legal practice is not like running any other business. Operating a law practice presents some unique challenges. Law firms must ensure that their technology and software systems are updated frequently to remain competent, safe, and competitive; invest in specialized marketing for lawyers; and scale the business while servicing existing clients.

The list goes on, as do the costs. For a firm to execute its short- or long-term goals while managing costs, law firm financing is often necessary.

Types of Business Loans for Lawyers

Below are a few of the many different types of business loans available for lawyers. Before choosing a loan, be sure you understand how each type of loan works before you committing to one.

Business Loan

A traditional business loan from your local bank is a standard option. Local banks compete for local business, which is to your advantage when you need personal attention. But the application process for a standard bank loan can be tedious and most banks have strict requirements to qualify. Also, banks typically don’t accept unrealized contingency fees as collateral, so just getting approved can be a hurdle for a new law practice.       

SBA Loan

A Small Business Administration (SBA) loan is a popular option for law firms. There are many participating lenders and different SBA financing plans available. SBA loans offer higher loan amounts, longer terms, and more flexible interest rates than traditional bank loans. For these reasons, getting approved can be difficult. You’ll need a good credit score and an established banking history to qualify. This was discussed in-depth in a recent NBI blog post. To learn more about SBA loans, go to: SBA Loan Essentials.

Line of Credit

Having a business line of credit offers several advantages for a growing law practice. You will establish a credit limit from which you may draw down funds as you need them. A fixed interest rate will apply to the funds you use, but you only have to use what you need. What you don’t use is simply available, much like using a standard credit card. The line of credit is revolving, so as you repay the funds you borrow, you rebuild the credit that is available to you.

Working Capital Loan

A working capital loan is useful for covering everyday operating costs. Day-to-day expenses like rent, utilities, payroll, and office supplies can zap your cash flow. A working capital loan can be a quick and easy fix to meet these expenses.

Business Acquisition Loan

Sometimes the best way to expand your law practice is to acquire an existing one. If so, a business acquisition loan can help. You’ll need to demonstrate some cash flow and a healthy credit score to get approved, but a business acquisition loan is a valuable long-term resource for growing your law practice quickly.

Merchant Cash Advance

A Merchant Cash Advance (MCA) is an option if you need a lump sum infusion of funds, but it can be a very expensive option. If you are looking for steady cash flow over the long term, an MCA is not the vehicle to use. To repay the lump sum you borrow, you provide the lender a flat percentage of your future sales for a fixed period at a very high interest rate. Be sure to balance these risks with the benefit of taking the loan before choosing an MCA as your borrowing option.  

Private Equity Loan

Resourcing funds through a private equity loan can provide greater financial and professional benefits because the lenders are invested in your success. The tradeoff is that you may have to give up some control–or even a percentage of ownership–of your business as your part of the bargain.   

How to Apply for a Business Loan for Your Law Firm

If you decide one of these business loans may be a solution for your law firm, be sure to follow these four steps:

1. Review Your Law Firm’s Financial Goals

To obtain the most useful business loan for your law firm, be sure to understand the firm’s short- and long-term financial goals. This requires that you have a firm understanding of things like:

• Basic business and financial terms;
• How to read a financial statement;
• How to value assets and liabilities;
• How to calculate a return on investment (ROI); and
• How businesses are structured and financed.

If you want to level up your business of law skills, there are many useful resources available that can help:

• Business Skills for Lawyers 2023
• How to Run a Thriving Small Firm
• Advising Startups and New Businesses
• Representing Small Business Clients 

2. Consider All Financing Options Before Applying for a Loan

Taking out a loan that serves your law firm’s financial needs at the right time can be a prudent decision. But every loan comes with the obligation to pay it back. If you can minimize the amount you borrow (or avoid a loan altogether) by tapping other financial resources and strategies, you should consider those options before applying for a loan. This might include:

• Using available cash or personal savings;
• Borrowing from yourself instead of a commercial lender (for example, borrowing from your own tax-exempt 401K savings plan);
• Partnering with other lawyers to share profits and liabilities; or
• Restructuring the business to accommodate limited investment partners.

You may also consider exhausting all other available resources before committing to a high-interest loan.

3. Choose the Type of Loan That Best Fits Your Needs

If you decide a business loan is the best or only solution, take some time to understand all the loan options available. Then consider the details of each type of loan to determine which type best serves your law firm’s needs. The most common types of loans are described here, but these are just the start. There are many other loan options available. For more detailed information about the loan process, go to Business Financing 101.

4. Work With a Lender You Trust

Whatever type of loan you choose, be sure to work with a lender you trust. Many loans are accessible online and can be applied for with just a few clicks of a mouse. You can be approved for a loan without ever speaking to another person. It is important to do your research to know which lenders are legitimate and reliable. If you do your research and take advantage of the resources available you will be better prepared to vet potential lenders, and ultimately, choose the one who is right for you and your firm.

Michael T. Flannery is the Judge George Howard, Jr. Distinguished Professor of Law at the University of Arkansas at Little Rock, William H. Bowen School of Law. He served as Associate Dean for Faculty Development from 2014 to 2016, and Associate Dean for Academic Affairs from 2018 to 2020. He teaches Family Law, Decedents’ Estates and Trusts, The Prudent Investing of Trusts, The Sexual Exploitation of Children, Animal Law, and Sports Law. He served as a Special Judge for the 20th Judicial District of the State of Arkansas between 2008 and 2011. He also serves as a Legislative Expert Liaison for the Arkansas Bar Association’s Legislative Committee on Family Law. He was featured on National Public Radio as an “Agent of Change.” Professor Flannery has published numerous case books and law review articles. His research has been cited by courts throughout the country. He speaks regularly on various panel symposia and is a member of numerous bar associations and legal organizations.

This post was written by a guest blogger. Although this article was thoroughly reviewed by NBI staff, the views, opinions and positions expressed within the post are those of the author alone and do not represent those of NBI. The accuracy, completeness and validity of any statements made within the post are not guaranteed. We accept no liability for any errors, omissions or representations.