How Law Firms Get Loans
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How Law Firms Get Loans

By Mike Rosen

October 2012

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Banks have traditionally viewed law firms as stable investments, because no matter the state of the economy, there's always a demand for lawyers. But the worst of the recent recession and several high-profile law firm bankruptcies in the past year have disproved that truism. Now, in California and across the country, many banks regard loan applications from law firms with a more critical eye, so hopeful applicants need to take every opportunity to demonstrate that their firms are a good risk.

To build a working relationship with your future lender, the first step is to investigate which local or regional banks have a history of working with lawyers in your position.

"The most important thing is to thoroughly interview your lender," says Dave Kaneda, regional sales manager for Wells Fargo SBA Lending in San Francisco. "When a banker looks for an attorney, he doesn't just look for the cheapest legal advice - he goes to the one that's got referrals. As a lawyer, you should do the same with your banker."

Choose, Then Schmooze
Lawyers tend to wait until they need a loan before approaching a bank, but the important legwork of building connections should begin long before then. In 2008 when Daryl Binkley opened a Palm Springs-area practice, he needed a microloan to cover office rent and telephone bills for the first year while he cultivated paying clients. He began his banking relationship by meeting with the president of a local bank over coffee at Starbucks.

"I went to them and said, 'Hey, you're a small bank and I'm a small guy. Let's create a relationship,' " Binkley says. "It's important that people know who they're doing business with."

Whether you meet your banker by sharing duties on the board of a local service organization or by opening a general account at a branch, it's good to become a familiar face to the person who can best advocate for you inside the bank bureaucracy.

"Most banks will set up loan committees to assess applicants," says Edward Poll, a Venice law practice management consultant and author of The Successful Lawyer-Banker Relationship. "Find someone high up in the bank with some sway in the committee. You need to know your banker before you approach them for a loan. A warm call is easier than a cold call."

Detailed Plans
After building rapport with your banker, the next step is to create a business plan that details the legal services you intend to provide, how you will bill clients, and how you will market yourself.

Determine how much money you're going to need. "Don't just say 'Give me as much credit as you can,' " says Silvia Marjoram, regional vice president and senior credit manager for American Business Bank in Los Angeles. "It sounds like you do not know what your financial needs are, and [this] won't convince the bank that you've done due diligence."

At this point, you should also make sure that all of your personal finances - and those of your business partners - are in order; few things will scuttle your application more surely than trying to hide your financial history.

If possible, start-up applicants should set aside enough cash to fund the first three to six months of operations in case the loan falls through. This will bolster the bank's confidence in your ability to plan ahead.

"Many attorneys are completely leveraged when they begin their careers as a result of student loans," says Kendra Edson, vice president of private and legal services banking at City National Bank in Los Angeles. "They initially feel relieved when getting their first position, and rather than paying down debt, they buy homes, go on vacation, etc. They need to realize that nothing is guaranteed, so they need to have a secondary source of repayment."

Banks weigh a number of factors when they consider making loans, including the applicant's experience in the field and the purpose of the loan. A lawyer seeking money to cover payroll expenses will probably not receive a favorable review, but one looking to expand into a second office or buy new office technology will be more attractive. Consistent financial performance, responsible financial management, and collateral to secure the loan are also important. That means revenues and expenses should remain consistent - both in relation to each other and from year to year. (This is why law firms that work on contingency tend to be a harder sell.) A firm demonstrates responsible financial management in the way its partners manage assets and liabilities - including how much capital they leave to support the business as opposed to distributing as profit among the partners.

A Personal Guarantee
"Banks will always also want personal guarantees from the partners, which invariably becomes a strong point of contention - after all, we're talking about lawyers here!" says Mitchell D. Weiss, an adjunct professor of finance at the University of Hartford's Barney School of Business in Connecticut. "For me, not having a personal guarantee is eight times out of ten a deal killer."

Personal guarantees are a standard requirement for most loans, but since lawyers spend most of their time advising clients not to agree to personal guarantees, they're often loath to sign these documents themselves. Still, partners can easily raid the firm's coffers for their personal use, so lenders normally want a personal guarantee that will let them go after a partner's personal assets in the event of nonpayment.

On rare occasions, a bank may forgo the personal guarantee if a firm demonstrates that it has enough liquid, viable assets (generally, you need three liquid dollars invested in the business for every one dollar that you borrow). In such cases, lawyers can try to negotiate to instead sign a financial covenant to maintain sufficient capital on hand instead of distributing it to the partners. Alternatively, borrowing lawyers can negotiate a requirement that they be released from the personal guarantee once they've met certain clear repayment milestones.

Ultimately, you'll need to get the bank to believe in your firm as much as you do. Even if you don't have a long practice history to fall back on, a friendly lender relationship and a solid business plan can be enough to help you succeed at getting financing.

"Everything is about story," says Binkley. "Even if you don't have much experience, you have to take all the info you have and position it as a story. If you're doing summary judgment motions all day, you might not be the sort who would naturally think in terms of story. It's a different skill set. Lawyers think like lawyers, but they need to think more like entrepreneurs."

Mike Rosen is a contributing writer for California Lawyer.


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