When Should a Law Firm Obtain a Line of Credit?

Most law firms struggle with occasional or frequent cash crunches: situations where you simply do not have enough money on hand to pay payroll and other expenses. Cash crunches are not always related to profitability either – instead, you just can’t get your income to match up with your expenses during the month, so you have to keep loaning money to the firm or desperately seeking out additional financial support.

It’s a common problem with any business, but it is especially common in the legal world, as attorneys are often faced with non-paying clients, delayed judgments, hold-ups from insurance agencies, and other issues that lead to delayed, missing, or otherwise unavailable payments.

At CathCap, we’re often by our attorneys how they can get off the Merry-Go-Round, and our answer is always the same:

Every firm, of any size, should have a line of credit.

The Problem Is: You’re Already Too Late

You need a line of credit – a pool of cash that you can access when you need it, and pay back when your payments and judgments are deposited. Lines of credit are typically offered at lower interest rates, more flexible payments, and they have immediate availability, so you never have to scramble for cash.

But that also brings up another problem. Uou know that you need a line of credit. But when should you get it?

The best time to get a line of credit is when you don’t need it. The second best time is yesterday. If you need one, you’re already too late.

Seeking Cash from Guido, the Megalodon of Lending

One of our clients contacted us. They were in a major, major cash crunch. They had to pay a lot of expenses, and while they did have revenue in the pipeline, that revenue was not going to come for a very long time. They needed cash now to help them cover expenses until the windfall hit.

So they went to their back, showed their profitability, and asked for a line of credit.

They were immediately denied.

They were shocked. But to us, this wasn’t surprising. They’re in a severe cash crunch. They needed to front hundreds of thousands of dollars, long before they were ever going to get paid. We know that their profit is coming, but to a bank, they are extremely high risk.

Banks base their lending on risks. When you need the money most is when you are typically at a higher risk, and thus not an attractive borrower to the bank.

Because this firm did not already have a line of credit, they ended up seeking out (without our knowledge) a connection of a connection in New York. This guy was the sharkiest of loan sharks, personally offering them an embarrassingly high-interest rate and unfavorable loan terms. We were, genuinely, concerned that if our client didn’t make a payment, this guy and his friends would show up with bats.

It took a lot of time and effort to get him out of this hole with the loan shark with both of our clients’ knees intact, but the takeaway from this is that all of this could have been avoided if our client had obtained a line of credit.

When to Get a Line of Credit

Remember: Banks look at your profitability and your risk when deciding whether or not to give you access to credit. That means that the best time to obtain a line of credit is when you don’t need it.

When you’re having a profitable year, especially when it’s followed by yet another profitable quarter, THAT’S the time to apply for a line of credit. At that point, you’re able to prove that you are profitable, low risk, and worth their investment. Apply during this time, and you’ll have access to an excellent line of credit that can help you through all your cash crunches.

But of course, you need cash as soon as possible, and you may not yet have applied. So what’s the next best time to apply?

Any time before today.

Getting a line of credit is about timing. Your line of credit is an insurance policy. Banks don’t like to loan money to those having cash flow issues or are in desperate need of cash. They also are more likely to lend to those that they have a relationship with – clients of there’s whose cash flow issues they understand.

So, unfortunately, if you need a line of credit now, your odds of obtaining it are slim and – even if you do obtain it – your odds of getting favorable terms are even slimmer. It’s worth applying, but if you already need it then it may be too late.

HOWEVER, there are strategies that you can use to make yourself look more profitable despite needing the money, including invoicing strategies, A/R strategies, and others. In addition, if you know what banks are looking for, you can sometimes leverage that information to improve your chances of approval.

If you’d like to learn more about how to make yourself a more bankable company, click here to receive some of our free resources.