Many law firms require a credit line linked more to their legal work than to simply being in business. Almost every commercial venture borrows money either as a set loan amount or as a line of credit to be drawn on as needed.
Why Do Law Firms Want a Credit Line?
- Initially, as with most businesses, a law firm wants a credit line to cover its fixed and variable costs such as payroll, rent, etc, should income be insufficient in any one month. This is especially true when the firm is just starting in business.
- Subsequently, the firm may want to expand into new areas of litigation such as mass tort or into a new geographic area. A credit line may assist with such expansion.
- Additionally, to help fund its litigation cases. Some lawsuits take a long time to come to judgment. This may be because the case is complex, takes a long time to assemble evidence and receive opinions from court-approved experts, collate everything, and be ready for the suit to proceed. It may also be because a successful judgment does not result in the speedy paying of the award. Delays such as these do not delay all the current costs from having to be covered and the previous costs that were covered.
How Do Law Firms Arrange Credit Lines?
- Many lenders associated with the American Banking Association will arrange loans. Most banks lend money against fixed assets. Those assets may belong to the firm or to, say, the principal partner who secures the finance against personal property. One issue some law firms have to contend with is that they may have a loan in place with their bank and then need to increase the loan or extend the line of credit. Some banks may require the original loan to be merged with the new financing. One result may be that the increased amount comes at a higher interest rate.
- Another approach may be to work with a specialist finance company. Such companies understand that law firms need credit lines to cover costs associated with lengthy case preparation or delayed awards. They also understand that moving into a new and lucrative area of practice, such as mass tort, may take time to prove its profitability. Such lenders, unlike some banks, will consider the portfolio of cases in preparation or settled and awaiting award to be assets that can be borrowed against.
The Takeaway
Credit lines are the lifeblood of many law firms. Complex cases, delayed payments, and expansion-funding are part and parcel of the business. They should not be a reason to seek early settlements simply to avoid borrowing against a future judgment. Successful law firms deliver the best results for their clients, and funding long cases which delay payments is part of long-term success. If you would like to learn more about how we achieve success for our clients, please click this link to contact us.
