A Revolving Credit Line: Why it’s Better Than a Term Loan

Broadly speaking, a revolving line of credit is similar to a term loan—a lender advances your firm funds that you can use to finance expansion or to even out irregular cash flow. However, there are some key differences that make it a more valuable financial tool for contingent fee firms than a traditional loan.

The most notable difference: a revolving credit line provides you capital that you can draw any time you may need it.

What is a Revolving Credit Line?

With a revolving credit line, a lender grants you a maximum principal amount for a specified period, which you can access at any time to cover significant or ongoing expenses as they arise.

The main function of a revolving credit line is to provide you capital for multiple purposes and varying timeframes without you having to acquire a new loan or restructure your loan each time you need financing. Find out the fundamental differences between a loan and line of credit here.

Terms and Structure of a Revolving Credit Line

A revolving credit line agreement generally details your firm’s obligations to the lender, contains typical representations and warranties, provides the maximum principal amount granted to your firm, specifies the interest rate that will accrue on the amount you actually draw against the line of credit, states when the line of credit will mature, delineates penalties if you default and describes repayment terms and conditions.

Usually the agreement will begin with the basic information about the parties involved, followed by a brief summary of your firm’s credit line. This summary often includes a concise discussion of the purpose of the line of credit and how funds will be distributed. Specific condition precedents on which the credit line rests are included as well. For example, statements of collateral for secured lines of credit or particulars concerning your firm’s responsibilities may be referenced here.

How Can a Revolving Credit Line Benefit your Law Firm?

Many contingent fee firms choose credit lines for financing because of the flexibility this structure offers. In addition to giving you access to a steady, reliable source of revenue when you need it, here are a number of notable reasons why firms typically choose to use revolving lines rather than a term loan:

• Once your revolving credit line is approved, you can obtain working capital right away and thereafter whenever you make a funding request;
• You only pay interest on the amount you actually borrow, rather than on the maximum amount of your line.
• You can decide when and how your credit line proceeds will be deployed (e.g. case expenses, marketing and advertising, firm expansion, capital restructuring, overhead, etc.).
• You can generally pay down your line and re-borrow as often as you want.

Beyond the foregoing, specialty law firm financing companies in particular, like Counsel Financial, will often increase your revolving credit line as your practice grows because the fees from your cases serve as collateral for the loan—essentially giving you infinite growth capital without the need to continually refinance. Consequently, firms seeking to expand their footprint or industry presence frequently select this type of financing.