YourABA April 2012 Masthead

Financing a law practice: lawsuit funding, business incubators, more

Are you thinking about hanging a shingle? If so, financing the practice is likely top of mind. According to practice management advisor David Bilinsky, “Many investors, from small private lenders, all the way up through banks, are eagerly looking for options for big returns on their unemployed cash.”

In his article for GP Solo Magazine, “Financing a Law Practice,” Bilinsky says that a new, growing class of financial institutions is very interested in financing proposed or ongoing lawsuits, as various lending opportunities have dried up in the last several years.

While most of these lenders are aimed at providing pre-settlement money to clients, others seek lawyers, particularly those handling class actions, medical malpractice and other complex, expensive cases. More than $1 billion is now invested in such suits.

“Some courts have ruled that materials that have been provided to lenders during the loan evaluation process are no longer privileged and must be turned over to the opposing party if sought during discovery,” warns Bilinsky.

However, these loans are not cheap, warns Bilinsky. Interest rates can range from about 15 percent to 24 percent per year or more.

Also, “The high-end lenders and many that seek lawyer and law firm borrowers require their loans to be repaid, regardless of the outcome of the case,” cautions Bilinsky, noting that some law firms end up in bankruptcy because of these loans.

Beyond minding the fine print, Bilinsky urges lawyers to consult the ethical rules in their jurisdiction on lawsuit financing. Even if these loans are valid in a particular jurisdiction, lawyers should understand the possible loss of attorney-client privilege, as “some courts have ruled that materials that have been provided to lenders during the loan evaluation process are no longer privileged and must be turned over to the opposing party if sought during discovery.”

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Among more traditional financing options, Bilinsky provides some guidance:

Loans from friends and family – This option is fraught with the potential for conflicts of interest, and many lending situations end up in disagreement over repayment. Drafting an agreement on interest rates and repayment terms is important. As well, “Be sure to consult a tax advisor prior to taking a loan from a relative, as under-market rates may have adverse tax consequences for both lender and borrower.”

Personal credit cards – A card with no annual fee and 0 percent interest over a period of time can be a good way to reduce existing credit card debt. However, “Only do this as an absolute last resort; this ‘credit card kiting,’ as it is known, can damage your credit rating and financial stability.”

Bank loans – Lawyers must show that their firm will generate enough income to repay the loan, necessitating a written business plan.   

Small Business Administration loans – The SBA can provide loan guarantees that will induce a commercial bank to make a loan to a borrower. “But because you will have to meet both the bank’s and the SBA’s lending requirements, be prepared to jump through twice the hoops of a normal bank loan.”

Local business incubators – Also called small business resource centers, some incubators offer inexpensive office space including administrative support, Internet and AV services, as well as help with financial planning and marketing.

Regardless of the financing option selected, Bilinsky advises would-be sole practitioners to have enough cash on hand to keep going for at least six months, preferably for a year.

Doing so requires knowing how much money you’ll actually need, necessitating a budget as well as a list of law firm needs. Some of the items many lawyers forget include court fees, backup for electronic data and filing fees, among others mentioned.

Also, don’t forget to budget for personal living expenses—something most often overlooked. The failure to set aside money for such expenses while launching a business is the issue that most commonly dooms fledging law firms, notes Bilinsky.

GP Solo Magazine is a publication of the General Practice, Solo and Small Firm Division.

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