Getting a loan or line of credit can sometimes be a lengthy and complicated process. But, it doesn't have to be. Knowing what to expect when you apply for financing from a specialty lender can help you expedite funding and eliminate any issues that may arise on the road to approval.
What is the process?
Step 1: Application
You start the loan process by applying for funding. Initial questions on a specialty finance loan or credit line application generally involve:
- basic information about your firm, such as the name, address, size and nature of your practice;
- the type and amount of financing you’re interested in receiving;
- financial information about your firm and any proposed guarantors; and
- a summary of your firm’s cases.
If you want to expedite the process, have your key documents in order. Generally, this means pulling together your most recent financial statements, plus financial statements from the past two to three years, as well compiling tax returns for both you individually (and any other guarantors) and your law firm, along with your law firm projections or budget.
Most (if not all) specialty lenders analyze your cases prior to granting approval because they serve as collateral for the loan. Whether it’s an examination of a single case or a settled matter, or a holistic inquiry into your entire case inventory, it’s essential to document and have a comprehensive understanding of your firm’s cases and future fees because it’s likely your lender will review them in detail.
Equally as important, you should assess your firm’s short-term and long-term financial needs. Don’t only consider what you need now, but also what you will need for next 12-24 months and beyond. Read about how to prepare a budget here.
Step 2: Initial Evaluation
Once your application has been submitted, the lender may pre-qualify you for a loan—accelerating your funding request to the underwriting stage. Companies generally will only do this after a positive, high-level evaluation of your financial history, collateral, credit-worthiness and your personal character. Other factors they may take into account before making a pre-qualification determination include any preexisting debt you or your firm may have and the purpose for the loan.
Typically a loan officer will review the personal credit reports of all of your proposed guarantors, the amount of available collateral to secure the loan and your firm’s financial status. You also may be required to schedule an interview with a loan officer, which will give you the opportunity to further explain your financial history and credit needs. That discussion is particularly important to the lender because it provides an opportunity to assess your character and sincerity of purpose.
Step 3: Underwriting
After your application is preliminarily approved, you enter the underwriting stage.
During underwriting, a loan officer will more thoroughly review your cases, tax returns and financial statements. Typically, this includes an on-site review, sometimes referred to as an audit. With an on-site visit, the auditor meets with you at the principal location of your firm and spends a day going over, in detail, your cases and financial files. They use this information to assess your assets—primarily the value of your current and future attorneys’ fees—as well as your firm’s financials, to evaluate your financing needs and the risk to the lender.
Step 4: Commitment
Once the analysis of your firm is completed, the underwriters will decide whether to proceed with an offer of financing. If the lender is satisfied with the review, then you’ll be presented with a term sheet, which lays out the key terms of your loan or credit line—for example, the principal amount, interest rate, fees, repayment obligations and length of time the loan will remain outstanding. It also usually specifies the parties to the transaction and identifies any reporting requirements you must meet during the term of the loan.
Step 5: Closing
Upon agreeing to the key terms and conditions of the loan or credit line, the lender will prepare closing documents for your signature. At this time, you’ll be required to execute and furnish to the lender any outstanding documentation, such as a release on any preexisting liens, and any missing information requested during the underwriting process.
Once you execute the loan package, most lenders have the capacity to wire you the funds immediately. However, timing from the preparation of the loan documents to execution to funding can vary in large part on how fast you respond to your lender’s requests. If you have your paperwork in order, are responsive and available to sign, then the process will go significantly faster!