A growing alternative finance market runs alongside traditional bank lending and provides a variety of funding options for law firms. One common business area that benefits from funding is cash flow, whether the business is new are already well-established.
Other scenarios where you may require finance include acquiring another law firm, restructuring debts, paying your business tax and VAT liabilities, or covering your professional indemnity insurance premiums. Karl Hodson from UK Business Finance explains more …
What is cash flow funding?
Your law firm may benefit from cash flow funding as it helps to stabilise working capital availability and smooth day-to-day business on an operational level. Bank overdrafts are a common way to achieve this form of support.
A bank overdraft is an effective short-term form of cash flow funding that you can rely on as and when necessary. Overdraft terms are pre-agreed with your bank and you gain valuable flexibility by being able to use it when cash flow shortfalls are upcoming.
This type of temporary funding enables you to fill the gap between paying your suppliers and receiving payment from clients. If the overdraft isn’t used there is no interest to pay, but the bank will charge an arrangement and a renewal fee.
Are you growing your law firm?
Asset finance and practice loans are just two forms of funding that can preserve capital and support cash flow as you grow your business.
Asset finance helps you fund items such as office equipment, IT systems, and vehicles. It is a medium-term solution and typically repaid for up to five years with lending being secured on the asset in question.
You can opt for hire purchase to own the asset at the end of the agreement, or take out a lease if you don’t require ownership. This may be preferable in the case of technology or IT-related assets that quickly become outdated.
Law firm practice loans are specialist forms of fixed-term funding that can be secured against an asset, or unsecured. They may be used for a range of needs, including professional indemnity insurance, disbursements, practising certificates, and case acquisition costs.
Practice loans ease cash flow by spreading essential payments over 12 months, and are typically cheaper overall than a bank overdraft in this instance. They may also be used to spread the cost of your law firm’s tax and VAT liabilities each year.
Law firm acquisition
Specialist loans are available if you’re looking to expand your business by acquiring another law firm. This type of funding is typically repaid over several years, and financial assistance in the form of a deposit loan may also be required to complete the acquisition.
Eligibility criteria typically involve the value of the business being acquired as well as affordability for your own business, but acquisition funding is granted on a case-by-case basis.
If servicing your current borrowing is becoming unmanageable and cash flow is severely compromised, debt restructuring/refinancing may be an option. Refinancing involves taking out cheaper borrowing that repays existing debt under more favourable terms and conditions.
Cash availability improves as a result of the lower interest rate and single monthly loan repayment that replaces multiple repayments each month. Budgeting is easier and cash flow issues subside.
Commercial mortgages and bridging loans
An owner-occupier commercial mortgage is similar to a residential mortgage in that you pay a deposit, which is commonly around 25% of the property’s value. The remaining amount is repaid over a fixed term – typically up to 25 years – and the mortgage is secured on the property.
If you’re moving to new premises you may also need bridging finance. This provides funding to ‘bridge the gap’ if your sale hasn’t yet been completed but you need to move forward with your purchase.
Finding and securing law firm funding
Understanding your financing needs and how you will use the funds is key to finding the right solution for your law firm. With such a range of funding options now available you don’t have to automatically approach your bank.
Although the bank may offer various types of business loans, you may find that alternative lending is more flexible and potentially faster to access. Depending on the funding you need, lenders will typically need to view your accounts for the last three years.
You may also have to provide cash flow forecasts, a business plan, and other information that supports your application. This might include aged debtor reports, for example, details of your firm’s work-in-progress, and potentially some personal financial information.
Preparing well in advance of your application and understanding the data you’re providing is key. You’ll instil confidence in the lender that the firm doesn’t present an undue risk of non-repayment and secure the vital funding you need.