If you’re just starting your firm or looking to grow rapidly over the next year, you may be considering business loans for attorneys or other forms of law firm financing. Before you sign a promissory note on your next business loan, it’s worth considering how taking on this debt will impact your growing law firm in the short and long term.
Good Debt vs. Bad Debt
A good way of thinking about whether or not to take on debt in your law firm is to consider this mantra by Lyle Solomon, principal attorney for Oak View Law Group: “good debt returns money to your pocket, but bad debt takes money from your pocket.” We tend to agree with this sentiment and encourage law firm owners to act strategically when it comes to taking on debt for their firms. That means making sure that any new debt you incur is tied to a specific business purpose and that you have a plan for maximizing its impact so that paying it back is not a burden for your law firm.
Questions to Ask Yourself Before Considering Law Firm Financing Options
If you’re wondering what we mean by ensuring that your debt is tied to a specific purpose, there are a few questions that might help you better define whether or not the debt your considering is good debt or bad debt. For example:
- Is this loan to cover short-term expenses or long-term expenses?
- What can I expect to gain by investing this debt into my growth?
- How confident am I that my investments will result in a return for my firm?
- How can I make sure that I invest in the right things with this loan?
- If I achieve the expected results, how long will it take for me to repay the loan?
- Do I have the ability to repay the loan even if I do not achieve the expected results?
While there are certainly even more questions you should ask yourself, these are just a baseline to get you started!
Law Firm Loans vs. Law Firm Line of Credit
You should also carefully consider what type of debt you really want to use in order to fund your growth. In general, a law firm line of credit can be a good way to maximize cash flow and reduce the amount you’ll pay in interest. Using a line of credit could help you add capacity to your business or invest in different marketing strategies without taking out long-term debt. This is especially helpful because once a line of credit is paid back, it can be used over and over again to maximize your next moves.
A small business loan is also a way that you can fund growth strategies within your law firm. There are many different loan structures available to law firms and small business owners, so payment terms will vary. However, you’ll want to ensure that whatever you invest your loan in is going to result in a return big enough to pay it off early and reduce interest fees.
How Law Firm Debt Impacts Your Business
The biggest impacts debt will have on your business is how it affects your equity, business credit score, and ability to sell your firm if you choose to do so in the future. When you take on any type of business debt, you will lose equity in your law firm. Thus, you want to make sure that you pay it off as quickly as possible and that you don’t take on too much debt at once.
You also want to make sure that you make on-time payments consistently and don’t keep a high balance on revolving lines of credit. If you do decide to use a bigger loan in the future to buy a new building for your practice or some other significant investment, you want to make sure that your credit is in good shape to get the best terms. Finally, your debt will impact your ability to sell your firm. If you’re looking at selling your firm in the future, it’s best to prioritize quick debt repayments and maximize your equity. This will help you make the most of selling your firm.
