Does your law firm need a loan?

Why do lawyers need loans? The reasons are many and varied, so it may be worth reviewing how solicitors typically fund the legal services they offer.

Funding

In many respects – whether your firm is structured as a partnership or a limited liability company and whether you are established in the city or running a rural practice – a firm of solicitors operates like many another business.

Set up and working capital is likely to be raised from contributions from individual partners or the issue of shares by a company and revenue is generated from fees through the provision of services to clients.

In the case of a firm of solicitors, however, there are likely to be a number of different fee structures that may be employed and much of the work might involve clients in receipt of legal aid. Some of the implications – for both clients and solicitors alike – are explained by the Solicitors Regulation Authority (SRA).

The range of potential charging structures, may make income streams more difficult for solicitors than other businesses to budget and manage.

Borrowing

Like many another business, a firm of solicitors may need access to additional working capital – to invest in premises, equipment, and information technology systems in order to keep the firm competitive in a fast-moving world, so that, at the very least, it keeps up with rivals and, if possible, betters them.

Access to that additional funding is likely to be made through borrowing – and there are a number of options:

Loans from partners

• partners may be in a position to make loans to the firm and these are likely to be reasonably long-term;
• however, partners’ personal finances may already be stretched to their maximum through their initial investment in setting up the firm or by buying into it;

Equity loans

• capital may also be raised through equity loans, which grant the lender a share in the commercial success – or otherwise – of the practice and, once again, are typically made over the relatively long-term;
• the sale of equity in the firm or company may of course involve the loss of a degree of independence in future decision-making and general management of the firm;

Secured loans

• more common, perhaps, is a loan secured against the assets of the firm or those owned personally by the partners;
• an obvious example is a mortgage which may be arranged for the purchase of new premises or a remortgage of existing premises to raise additional capital;
• a mortgage, remortgage or other secured loan, is typically a long-term commitment, requiring the repayment of both capital and interest;
• the longer the term of the borrowing, of course, the greater the total amount of interest paid over the life of the loan – and that rate of interest may be subject to change over that period;
• the repayment of a secured loan therefore entails long-term implications for the firm’s cashflow – and the assets against which the loan is secured remain at risk if there is a downturn in the firm’s finances.

Unsecured loans

• here at Professions Loans, we offer an alternative, in the shape of fixed rate unsecured law firm loans;
• you may choose the repayment term that suits your practice and its need for working capital over any period between just three months or as long as five years;
• since the loan is relatively short-term, therefore, interest accumulates over a much shorter period and repayments at a fixed rate makes cashflow management that much easier;
• with loans of between £5,000 up to £1 million available for your professional practice, this kind of unsecured borrowing also gives you considerable flexibility when it comes to applying the additional funds raised;
• the capital injection may be used for the acquisition of new assets vital to the firm’s success, the purchase and commissioning of modern IT support systems, leasing or other finance opportunities for the acquisition of further assets, or demands on working capital that might come from VAT and other tax liabilities or the purchase of the professional liability insurance required by practising partners.

Just as with any business, therefore, your firm of solicitors may need injections of additional capital from time to time – essential if you are to maintain your competitive edge in an increasingly fast-changing world of legal services.

Although you may have access to longer-term, secured forms of borrowing, a fixed rate unsecured loan may prove a versatile and flexible way of quickly and easily raising additional working capital when it is most needed, without the commitment to long-term repayment terms likely to involve an accumulation of considerable sums in interest.