Law Firm Funding and Financing: What You Should Know
You toiled through law school, you passed the state bar, and now you’re tasked with securing law firm funding to open up your very own practice. Whether you want to start a solo law firm or a small legal practice, like everything else in the legal world, it’s gonna take money.
The good news is, that a wide range of legal software solutions, virtual office services, and even financing strategies specifically geared for funding law firms make it easier to budget for everything you’ll need to run your legal business.
Finding accurate, relevant information and deciding which funding sources and financial models work best for the type of law firm you want to run is the primary challenge.
This article is designed to help you understand how to get law firm funding, how much working money you’ll need, and how much revenue law firms typically generate so you know what to spend on the right things – software, employees, legal insurance, for example – and not waste money on stuff you really don’t need.
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How Do You Get Law Firm Funding?
Most law firms typically draw from a variety of financial sources to obtain law firm funding. Some financing options are similar to the ways other businesses bootstrap their startup costs, including personal cash, personal lines of credit, and credit cards.
Still, you’re going to need more than that to pay for all of the must-haves to launch a successful firm, such as business equipment, law practice management software, marketing costs, and a few nice outfits to wear to client meetings.
One way to get law firm funding is to apply for a business loan. A few lenders, such as the Federal government’s Small Business Administration (SBA) and commercial operations such as American Express’s Kabbage, specialize in loaning smallish amounts to businesses that just need some startup money, say $150,000 or so.
What is Law Firm Financing?
Because of law firms’ unusual revenue operations, getting law firm funding can be challenging — especially for new businesses — to obtain the kinds of small business loans other companies can.
You know the deal: typically you get paid in lump sums — by winning a settlement, receiving clients’ fees, or turning in all your billable hours – which aren’t entirely predictable and consistent.
On the other hand, when law firms do collect –– the yields are pretty high. Those big sums make law firm financing an attractive option for specialized lenders in the burgeoning industry of litigation finance.
Law firm financing might be an option for you if you have some high-stakes cases.
The process works a little differently from a standard small business loan. It’s based on an investment principle called revenue-based financing, which was designed to take advantage of law firms’ unpredictable but high-yield income pattern.
In this model, investors provide what’s called nonrecourse advances, which — instead of using existing collateral to secure the loan – bases the loan amount on your firm’s future gross revenues.
Non-recourse funding usually ties the loan to specific revenue-generating entities — such as when you collect on a specific case – or the entire law firm. You can actually get non-recourse funding for yourself, as an attorney line of credit.
Though a non-recourse loan may be the right solution for your firm, this type of financing typically comes along with high-interest rates and some other downsides.
Fortunately, there are a few objective resources where you can research various lending options as well as study up on the business of running a law firm — which is a smart thing to do anyway. A few we like are:
Lawyerist: Comprehensive, non-biased guidance and online community for small firm lawyers.
Legal Business World: Global platform sharing insights on the legal profession, the business of law, and more.
Legal Business: UK-based publication offering thought-leadership, news, and analysis.
FindLaw for Legal Professionals: Deep dives on all aspects of the legal profession.
How Much Working Money Does a Law Firm Need?
Every legal practice is different, so the amount of working money you need to start and run your law firm will be different from your colleagues from law school. Where your practice is located, what your legal specialty is, how much you spend on marketing – these are all aspects that can vary wildly among different law firms.
The range can be as low as a few thousand bucks, but $10,000 to $15,000 will give you a much more comfortable place to start. According to Lawyerist, most attorneys had less than $5,000 in the bank when they started.
To determine what to spend money on and how much to spend, legal business advisors recommend creating a business plan – just like any other business would need to do – and mapping out your plan for growth in increments such as 1 year, 3 years, and 5 years.
Though you may be bootstrapping it at first, here are some basic best practices for new law firm businesses:
Pay yourself and your employees first.
Go simple with a virtual office receptionist, on-demand support from a legal gig worker service such as IncFile, Rocket Lawyer, Law Clerk or UpCounsel, and use Dropbox to keep your files safe.
Get business insurance from an online insurance policy provider that’s digital-first so you won’t be paying needlessly for administrative fees (or outdated risk management models).
Make use of legal analytics so you can make decisions based on data.
Use law firm practice management software to automate your business (and ensure you get paid!)
Establish some basic working principles to guide your work and create a company culture that reflects your values and goals.
How Much Revenue Does a Law Firm Generate?
How much money could your law firm make? Um, a lot. The biggest law firms in the United States make billions per year.
Though you too could rake in the bucks as a practicing attorney, the legal profession is notorious for burning people out. You never want to get into a position where you’re cutting corners or making dicey decisions because you’re in over your head.
That’s why it’s important to rely on your original business plan to scale your business appropriately.
Gross law firm revenue depends on many factors, including your gender, your client type, billing structure, and even the type of technology you use to run your practice.
If you’re wondering about how much money your lawyer friends are bringing in, it’s probably in the six figures. According to the legal research firm Martindale-Avvo, the 2019 compensation for providing billable legal services for a solo law firm was $150,000 per year.
The average revenue for lawyers working at small law firms was about $210,000.
Your business and operating costs are going to impact your law firm’s gross revenue, obviously.
But you may not need to spend as much as you think on essential services. Advances in some of the legal profession’s supporting businesses, including technology and insurance companies, have cut the costs of running a law firm by a big margin – making the barrier to entry much easier for the average attorney who wants to start and run their own firm.
