You've decided that your law firm may benefit from obtaining financing. What should you expect as you start the process? Here are three common FAQs to consider:
FAQ #1—What is involved in the application process?
Answer: The first step after an initial conversation with a potential lender is to fill out an application. This will provide the lender with basic information about you and your law firm and will cover details such as:
- Contact information
- Entity type (professional corporation, limited liability company, professional association, etc.)
- Primary practice area (personal injury, medical malpractice, mass tort, class action)
- Overview of staff and organizational structure
- Summary of current case inventory and estimated fees owed to the firm
Tip--While you await approval of your application, you can start preparing for the post-application phase of the underwriting process by gathering the following documentation:
- Malpractice insurance
- Current case list (including summaries, docket numbers, disbursements, and more)
- Financial statements and tax return documents
- Budgets and projections
- Any other loan agreements the firm is currently engaged in
FAQ #2—What if I have a bad credit score or there are other blemishes on my financial history?
Answer: Most lenders will take a thorough look at your background and your firm’s history. The first step will be to run a credit report, which will require your authorization to do so. This is not necessarily a “make or break” figure, but if your credit score is on the lower end it’s a good idea to work toward increasing it before you start the financing process.
Other considerations that will need to be discussed with your lender include:
- Any bankruptcies
- Unpaid tax liabilities
- Litigations or judgments against you or the firm
- Active liens
Again, as with your credit score, these aren’t automatic disqualifications. However, you should be prepared to discuss these issues if they exist and explain why they will not impact your ability to repay.
FAQ #3—What happens if I have pre-existing financing?
If you currently have a bank loan or other type of financing, you may wonder what will happen once you decide to switch to a specialty lender. It’s standard in the industry for a law firm lender to require a “first lien ” on the collateral supporting the funding, meaning in the event of a default the lender is repaid first on sale of the assets that secure the loan. Should you be intent on keeping both your existing and new financing, you’ll likely be required to enter into an intercreditor agreement, which will set forth the priority of liens and priority of payment between your two funders. Note that the financing company will file a UCC-1 financing statement (pursuant to the uniform commercial code) on the public record to perfect its security interest, even in instances where the collateral is non-traditional (i.e. contingent-fee cases).