For the most experienced litigators, the thought of talking to a bank loan officer can be scarier than facing a tough judge. That’s because most firms approach a bank only when they urgently need money. The truth is, banks prefer to issue law firm loans and lines of credit to businesses that don’t absolutely need the funding.
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When it comes to securing law firm financing, we have a saying:
“The best time to ask for a line of credit is when you don’t need it, and the second-best time is yesterday.”
If you are approaching the bank today, the best thing you can do is prepare an iron-clad law firm loan package.
Meeting the Core Law Firm Loan Application Requirements
A successful law firm loan package consists of the documents the bank needs to determine if you are a good credit risk. These are the essential law firm loan application requirements that lay the financial groundwork for any commercial lender.
Items You (and Your Tax Accountant) Must Provide
You should have copies of these readily available. If you don’t, contact your tax accountant immediately—they are critical components for any law firm loan.
- Two to three years of corporate tax returns.
- Two to three years of personal tax returns for all owners above a certain percentage (usually 15%).
- A copy of all owners’ IDs.
Financial Statements Your Bookkeeper Has
Your bookkeeper should be able to quickly produce the following financial statements. If they are reluctant to do so, that is a major red flag—running these reports should take less than five minutes. Banks rely on these to assess your current financial stability and past performance before approving a business loan for your law firm.
- Prior two years’ Income statement and balance sheet.
- Year-to-date Income statement and balance sheet.
Forms Provided by the Bank
Most banks will provide you with a standard loan application. The crucial form, however, is the personal financial statement (PFS).
It’s an excellent practice to complete a personal financial statement every January regardless of your funding needs, as it helps you know where you stand financially and significantly speeds up the law firm financing process. When completing your PFS, remember:
- Focus on obligations: The bank wants to know your necessary, non-discretionary payments. Do not include large annual personal expenditures that are discretionary.
- Pick the best time: When stating account and house values, choose the point in time (e.g., end of quarter/year) when the values were highest.
- Optimize real estate value: Use resources like Redfin, Zillow, or Trulia to find the highest, yet still truthful, valuation for your personal real estate.
By filling out your PFS in an advantageous, yet truthful, way, you can drastically increase the probability of getting that law firm loan.
The Personal Statement: Communicating the Value of Your Law Firm Loan
The last, but arguably most important, piece of your loan package is the personal statement. The bank wants to know who you are, if you are a good credit risk, and why you want the money. This is your chance to detail your plans for the future growth of your firm.
While a bank can repossess machinery from a manufacturing business, they can’t take your legal services. Therefore, they need assurance you will use their law firm financing responsibly.
The key is to demonstrate a clear Return on Investment (ROI) for the loan:
- Myth: Banks want to lend you $100K for vague “operating capital.”
- Reality: Banks would much rather hear that you want $100K to offset the first six months of a new litigator’s salary. You can then show that this litigator will bill at $500 an hour, increasing the firm’s production by 12% or $360K in that time period.
- Reality: You want $100K to implement new practice management software that will streamline operations and eliminate the need for two legal assistants, saving $120K in salaries.
As you write this narrative, think about what makes you an attractive, stable, and growing low-risk business for the bank. Be honest about current problems and what you are doing to remedy them. A well-communicated story is essential for your banker to present your law firm loan request to the credit committee..
One Crucial Piece of Advice on Law Firm Financing
Be mindful of your firm’s profitability as reported to the government.
That aggressively creative accountant your friends use—the one who ensures they never pay taxes—is not doing your firm any favors when it comes to securing law firm loans. Why? Because to the bank, your firm looks like it doesn’t make any money, which makes you a poor credit risk.
Very few people have successfully argued that dodgy tax strategies should make their law firm financing more attractive. Since the bank requires two to three years of tax returns, it will take a long time for your financial picture to look better. When seeking a law firm loan, make sure your books accurately reflect a profitable business.
More Law Firm Financial Tips from Brooke Lively
For more tips on building a more profitable law firm, read:
- What Should Be on Your Law Firm’s Dashboard
- Are Your Law Firm’s Financial Systems Ready to Scale?
- Law Firm Profits: 5 Ways You May Be Sabotaging Your Firm’s Growth
- The Best Compensation Plans Use the Law of Thirds
- Law Firm Overhead: What It Is — and What It Isn’t
- Building a Law Firm That Pays You First
- Understanding Law Firm Profits — And What to Do With Them
- How Are Law Firm Owners Paid? Total Compensation vs. Salary
- Funding Growth: Are You Starving Your Law Firm?
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