Practicing law can be rewarding when you make a difference in the lives of your clients. It can also be a highly lucrative field; the average attorney’s salary is over $130,000 depending on the type of law practiced and the region where the practice is located.
With these rewards, comes a lot of competition. Many attorneys will need law firm loans to help them jumpstart their new firm.
According to the American Bar Association, there are currently over 1.3 million licensed attorneys in the United States, with over half of them in just California, New York, Texas, and Florida. Starting a new firm can run between $5,000 and $15,000, depending on the location and type of practice you open.
While plenty of successful attorneys work from home, most lawyers can expect to open a brick-and-mortar practice within a year of starting at home, according to Lawyerist.com. It can be quite expensive to set up, so lets take a look at some law firm financing options.
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Law Firm Financing Options
Law firm loans by the Small Business Administration are easily the best choice for lawyers looking to start or expand a firm. SBA loans, as they’re called, are approved by a bank but partially insured by the government, which makes lenders more willing to approve your application. They have slightly higher rates than private industry loans, but they also come with longer terms and higher maximums. The SBA 7A loan program offers up to $1.5 million in loans, although most firms only take out about $150,000.
The loans can be used for everything from furnishing your offices to buying electronics, advertising, leasing a building, or anything else you could need to get started. In order to apply, look for lenders who do SBA loans, such as Wells Fargo, Citizens Bank, or other large lending companies. SBA Loan Group is another lender that offers SBA loans specifically geared toward law firms, and terms can go up to 25 years.
Established attorneys can also take out law firm loans based upon cases they expect to win. Amicus Capital is a company that offers law firm loans, secured by a future verdict or settlement. According to their website, they can offer four to five times as much as a traditional bank, all secured by your case portfolio. The best part is that interest is only paid on cases that are not resolved in your favor, which means lower overall expenses for you and your practice.
You can also check with your local bank for their commercial or business loan products. They may be outside of the SBA guarantees, but they are an option if you have a relationship with the bank and have a solid credit history.
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Common Costs for a Law Firm
Attorney firms are expected to have a tastefully decorated waiting area for clients, professional staff, and nice offices; this gives the impression of credibility and professionalism. They also often need to hire paralegals and other personnel, or contract out for services specific to a case. Depending on the type of law practiced, hiring experts can run into hundreds of dollars an hour.
In addition to the standard overhead of running an office, attorneys need to maintain memberships with various associations and research libraries, pay for continuing education each year, and maintain their license to practice law. Word of mouth is excellent advertising for a law firm, but attorneys often need to run marketing campaigns as well. Liability insurance, including a malpractice policy, is another expense that, while optional, is highly recommended.
Many new lawyers looking to hang up their shingle often forget about living expenses for themselves during the firm setup phase, and this can be a costly mistake. While you’re pouring all of your energy and finances into your new firm, your rent or mortgage, auto, and grocery expenses are still there.
Law Firm Financing Challenges
Being a practicing attorney can often be a feast-or-famine venture. Many of the best small business loan lenders are not overly-willing to lend to a newly licensed lawyer that might not have a stable income for a while—especially if that new attorney is also just starting to pay back an astronomical amount of student loans. The average graduate from law school will finish with up to $170,000 in student loan debt. Over the life of those loans, that graduate could end up paying over half a million dollars due to interest.
With that much debt before you even start, you could find lenders less than willing to offer you more credit to start your practice. In 2013, only 51 percent of law school graduates were able to get work immediately after graduation in an existing firm. Forbes reports the lower numbers are driving more new lawyers into public sector jobs or even other career fields entirely where their law degree is still useful—but they aren’t practicing law.
Another potential obstacle to getting approved for a business loan for your practice is your own credit. If you have less-than-stellar credit, you could find those law firm financing doors closed to you—at least if you wanted decent interest rates.
To have the best chance of approval, you’ll want to have not only your business plan, but any operating agreements, a copy of the lease for your office space, planned expenses, and even your personal tax return. It’s also a good idea to have summaries of your case portfolio as well – if you have one.
Whether you’re just starting out in your own practice, trying to infuse an existing practice with some much-needed operating cash, or looking at financing an upcoming litigation, there are options available. You’ll need to make sure your plan is solid, your paperwork is in order, and you have a clear path forward. If you do, you very well could find lenders more than happy to approve your financing requests.