How to raise corporate finance for your law firm

Whatever the age, size or structure of your law firm, you can’t achieve your goals without the right funding.

Indeed, badly structured or inadequate financing is one of the most common causes of practice failure.

Here’s how you can raise corporate finance for your law firm.

Apply for a traditional bank loan

A traditional bank loan is a sum of money loaned to an enterprise by a major bank, credit union or building society.

These loans are typically used to support growth or invest in equipment or new products, but they may also be used to support a business through uncertain times.

Some banks may set limits on how much they are willing to lend businesses depending on whether the loan is secured or unsecured – £100,000 is a common figure.

There are two major types of traditional bank loan:

Unsecured loans – These loans don’t require business assets to be put up as collateral and allow law firms to access financing more quickly than taking out a larger, secured loan.
Secured loans – These require partners to put assets up as assurance that they will repay the loan. You can usually borrow more than if you take out an unsecured loan.

Once you have taken out a loan, it is simply repaid, along with interest, over the agreed time period.

The major issue with traditional bank loans is that they may reject your application if they do not think that you can meet your repayment obligations, or if your business has a poor credit history.

How you apply for a bank loan will depend on which institution you approach, but you will typically need the following information:

Your financial records, including existing finance.
Evidence of assets and the value of your practice.
A business profile.
Record of ownership and management.
A business plan for how you will use the funds.
Projections to ensure you’ll be able to repay the loan.

You will also be subject to a credit check before your loan is approved. Most banks will have a “Responsible Lender” policy in place, meaning they will not approve your loan if they don’t think you will be able to pay it back.

Challenger bank loans

Set up as alternatives – or challengers – to traditional banks, challenger banks are recently-established banks that directly compete with the “Big Four” (Barclays, HSBC, Lloyds Banking Group and NatWest).

Distinguished by embracing a technological approach to banking, these banks might not have brick-and-mortar branches, instead favouring online services and loan applications.

They may be able to provide a traditional bank loan to businesses in need of additional finance with a more accepting credit policy.

Challenger banks are popular with small and medium-sized law firms because of their forward-thinking approach to technology and lending.

The main downside of challenger bank loans is that, because these institutions are smaller and less established than major banks, they may have less capital at their disposal.

This means they may not be able to lend you as much money as a traditional bank and may apply higher rates of interest to the loan.

Working capital funding

Working capital finance is essential for covering the gap between a law firm’s stock and debtor value and its creditors.

Keeping a robust cash flow is crucial, even with strong sales, and there are various financial solutions available to support law practices.

Business credit cards: These function similarly to personal ones, designed for short-term lending to finance purchases and cash withdrawals. Using a business credit card can enhance cash flow with minimal costs, streamline expense management, build a credit history, and segregate personal and business finances. However, they come with associated costs like annual fees, interest rates, late payment charges, foreign transaction fees, and cash withdrawal charges.
Stock finance: Similar to debtor finance, stock finance mitigates the impact of costs associated with unsold stock on cash flow. It allows firms to borrow against the value of their unsold inventory. Stock finance can be part of broader invoice financing solutions.
Overdrafts: Akin to personal ones, business overdrafts allow spending and withdrawals beyond the account balance, up to a certain limit. They provide flexibility in managing short-term cash flow fluctuations, although extended use can lead to substantial costs. Lenders evaluate overdraft requests based on several factors, with the requested amount ideally aligning with the balance among stock, debtors, and creditors.
Debtor financing: Tied to the debts owed to a practice, debtor financing includes invoice discounting and factoring. This type of financing is scalable with business growth, as the available financing increases with the amount owed by trade debtors. Invoice financing, where a lender pays a percentage of each outstanding invoice, is useful for managing cash flow affected by late invoice payments.

Investment and third-party funding

For small law practices seeking an alternative to taking on additional debt, or who may have been denied a bank loan for any reason, you can obtain funding from other sources.

Funding from private investors typically involves receiving a sum of money or repeated payments from a third party in exchange for a later benefit. This may include a portion of your net profit or a decision-making stake in the business.

Common types of private investors include:

Angel investors: Individuals or groups that provide capital for a business start-up, usually in exchange for shares or an ownership stake in the business. They often are entrepreneurs themselves or executives who not only invest but may also provide valuable management advice and important contacts.
Venture capitalists: Venture capital firms provide funding to start-ups with high growth potential in exchange for equity. They typically come in when a company has a proven track record and is ready to scale. These firms generally have a lot of capital at their disposal but may also demand higher returns.

Corporate finance for solicitors with Moore Thompson

At Moore Thompson Chartered Accountants, our corporate finance team can provide expert support for all your funding needs.

We have access to a wide range of funders and can advise you on different funding options, empowering you to make an informed decision on what is most appropriate for you and your circumstances.

Our corporate finance expertise and contacts will help you to open doors to financing that might otherwise remain closed.

For tailored advice and guidance on raising funding for your law firm, contact our corporate finance team today.