Andy Poole, partner in accountants Armstrong Watson, lists the types of finance available to law firms. (Updated 4 July 2022)
1. Overdraft/flexible line of credit. Flexible way to manage day-to-day cashflow shortfalls, though not the best way to finance longer-term borrowing requirements.
2. Fixed term loan. Secured or unsecured borrowing over an agreed term, often up to ten years. Typically used as core financing for growing the firm or a specific purpose (eg buying out a partner’s equity, investing in new technologies or funding premises refurbishment).
3. Factoring/invoice discounting. Allows the firm to borrow against outstanding invoices – typically where payment is due within one or two months. A good tool for funding a growing case load, but law firms can find this kind of financing difficult to arrange.
4. Asset finance. Hire purchase and leasing arrangements to spread the cost of vehicles and equipment (such as computer systems). Typically covers up to 80% of asset cost.
5. Commercial mortgage. Long-term financing secured against the firm’s premises – either for premises acquisition or to release capital tied up in an existing property.
6. Soft loans/grants. Provided on favourable terms by funders interested in supporting your business. Limited availability, but some funding may be available – for example, local authority or Local Enterprise Partnership loans that encourage local employment growth.
7. Specialist loans. A variety of types of financing for particular purposes, such as short-term tax and VAT loans (to finance tax bills) and litigation or disbursement financing (often on a non-recourse basis). Typically provided by specialist lenders with legal sector expertise.
8. Partner funding. Partners can use existing savings (or personal borrowing) to finance the firm. Often the most realistic way of financing a small start-up practice.
9. Equity investment. Capital from third party investors such as business angels or strategic partners, who take a stake in the firm as either passive or active investors.
10. Arranging loans for clients. Certain funders will provide law firm clients with loans to pay their legal bills, which law firms can arrange on behalf of their clients. This typically covers work types such as probate and family work, where there is an asset that can be used to fund the cost of legal advice but the asset cannot be realised until the end of the legal process. Funders can use the asset as security, and law firms can then be paid as services are provided rather than at the end of the matters.