Why Doesn’t a Bank Understand My Firm?

Kelly Anthony, Esq. | Deputy General Counsel

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You have a plan ready-to-go for your law firm. Now, you need the funds to implement it. Case fees are unpredictable with respect to timing, so what do you do?

Many law firm owners first turn to a bank to get a loan. Banks are a reliable source of financing with generally low rates. However, there is one major problem—qualifying for the amount you want.

According to CNNMoney, 79% of business owners that applied for a bank loan were approved for at least some financing, but half of those applicants received a smaller amount than they requested. Small businesses in particular, like a plaintiffs’ practice, were dramatically more likely to experience a financing shortfall than their larger counterparts. Why?

Most banks don’t understand your business.

The frequently cited reasons for why small businesses don’t receive the funding they want from a bank include bad credit, cash flow issues and insufficient collateral. The latter reasons—cash flow issues and insufficient collateral—are especially problematic for law firms seeking bank financing.

1. Banks Seek Consistent Cash Flow, but You Don’t Have It.

Banks want to know that you are going to be able to repay your loan every month, plus have sufficient funds to cover your operating expenses, such as payroll, rent, inventory and case costs.

Some banks even go so far as to incorporate “pay-down provisions” into your potential loan—requiring you to bring the balance of your credit line down to zero for a certain number of days at least once during the term of the facility. 

Thus, the peaks and valleys in cash flow inherent to a plaintiffs’ practice conflict directly with what banks want to see from their borrowers.

For plaintiffs’ firms, being able to show consistent cash flow or the capacity to comply with strict pay-down provisions can prove difficult, if not impossible. You only get paid if your case is won, and then you may not receive your fees until months or years after due to circumstances out of your control like appeals, lien resolution matters, slow paying defendants and so on. 

This unpredictability in cash flow is why you need additional financing, but it is also why you can’t get it.

2. You Value Your Contingent Fees as Assets. Banks Don’t.

Collateral provides lenders assurance that if you default on your loan, then they will have another source of repayment. Generally, the more collateral you pledge to a lender to secure repayment, the larger amount of financing you will receive.

Banks typically take a conservative approach when it comes to the type of collateral that they will value to support a loan. Commercial real estate, equipment, cash, inventory, accounts receivable and your personal assets are all forms of collateral banks may leverage.

Banks value hard assets because they can be readily seized or collected upon in the event you default. The same can’t be said for unearned legal fees. There is a chance you won’t collect anything at all, which means a bank may not either. 

The result? Your largest asset—your contingent fees—isn’t valued and you don't get enough financing or any at all.

The good news is that if a bank turns you down you may have better options. Law firm-specific lenders provide funding that is designed for the unique needs of a plaintiffs’ practice. The repayment provisions are flexible and the amount of financing they can offer is typically two to three times what a bank can provide because they take into account your contingent fees in determining the amount to lend.


The following article is part of a collaborative educational blog series, Finance Corner: A Guide for Plaintiffs' Attorneys and their Clients. If you are interested in receiving similar articles, you can subscribe here.

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Counsel Financial provides working capital credit lines exclusively for the plaintiffs' bar in all states except California, where credit lines are issued by California Attorney Lending