Debt Vs. Cash: How CFOs Think About Big Moves

Should a law firm use its own cash or take on debt to fund a big growth move? The answer depends on three factors, not one: whether the investment generates a modeled return, what it does to the firm’s cash runway, and who carries the cost over time. A CFO doesn’t default to cash because it feels safer, or to debt because it preserves liquidity. Those three tests run first, before any lender enters the conversation.

If you read our last post in this series on funding growth without stressing your cash flow, you know the stress is real. This one gives you the framework that resolves it.

Here’s the part nobody says out loud: most owners who built their firm from nothing carry a gut-level resistance to borrowing. “I don’t want to owe anyone anything” isn’t really a financial position. It’s closer to an identity position. That instinct is fine until it’s the only thing driving a six-figure decision. Then it gets expensive in ways that don’t show up until January.

Should a Law Firm Use Debt or Cash to Fund Growth?

Neither option is automatically right. Using cash preserves your balance sheet and avoids interest, but it drains the reserve you built for a reason. Taking on debt preserves that reserve but adds a monthly obligation and, for a lot of owners, a knot in the stomach that has nothing to do with the math.

A working capital floor is the minimum cash a firm needs on hand to make payroll, cover rent, and absorb slow collection months without borrowing under pressure. For most law firms, that floor sits at 10% to 30% of annualized revenue. Everything below gets decided against that number, not against how you feel about debt on a given Tuesday.

Does This Investment Generate a Return, and When?

This is the first test, and it’s the one that separates a growth decision from a wish. A new senior associate who builds a book of business, a second office in a market with documented demand, a technology platform that cuts real hours off admin work, these are productive uses of capital. You can model when they pay back.

Borrowing to cover a lifestyle cost, patch an operating loss, or fund something you can’t measure is a different animal entirely. If you can model the payback period, debt is worth evaluating as a tool. If you can’t model it, you don’t have a financing question yet. You have a strategy question, and no loan fixes that.

What Does This Move Do to Your Cash Runway?

This is where owners get hurt without realizing it, because the damage doesn’t show up on the day they write the check. It shows up three months later, in the quietest possible way: a missed vendor payment, a tighter payroll week, a partner asking why the account looks thin.

Before recommending cash or debt, a CFO asks two specific questions:

1. If we fund this move with internal cash, what does our runway look like in the worst three months after the decision, not the average month, the worst one?
2. Does that worst-month number stay above our working capital floor, or does it drop us below it?

If the firm stays comfortably above the floor, cash is often the cleaner choice. No interest, no lender relationship, done. If the answer is that the firm gets exposed, debt isn’t a consolation prize. It’s the tool that keeps your safety buffer intact while the investment has time to ramp.

This matters most around the calendar. Firms that distribute every available dollar in December often start Q1 with nothing set aside for operating expenses, then spend the first quarter managing a liquidity problem instead of enjoying the growth they just funded. If you’re weighing a big move in Q3 or Q4, run the runway math before the distribution conversation, not after.

Who Carries the Cost, and Over What Time Horizon?

This is the test most owners skip entirely, and it matters even more in multi-partner firms. Paying for a major investment out of cash in month one compresses income immediately, for everyone. In a firm with partners at different career stages, that hits unevenly: the partner five years from retirement absorbs the same hit as the partner just getting started, even though one of them has far less runway to make it back.

Spreading the cost over time through a term loan lets younger partners benefit from the investment as it pays off, without compressing the income of partners closer to retirement. For a single-owner firm, the same logic still applies. A long-lived asset, like a new hire who takes a year to reach full productivity, or an office buildout that serves the firm for a decade, should be financed over the period it actually earns, not paid for in one lump sum on day one.

Does It Matter What Kind of Law the Firm Practices?

Yes, and this is the part most generic financing advice skips entirely. A personal injury firm running contingency cases can wait 18 to 36 months to recover case costs and see net collections from a new hire. For that firm, cash reserves aren’t a preference, they’re existential, and debt is often the structurally correct way to fund growth because it protects the liquidity the practice needs to survive its own timeline.

A firm built on retainers, family law or corporate work, collects cash before the work even starts. Its cycle is shorter and more predictable, so cash-funded growth is more realistic if the reserve is already solid. Flat-fee practices like immigration sit in between: revenue is steady but volume-dependent, so debt to build capacity ahead of volume is often the more defensible move than burning cash during the ramp-up.

What to Do Next

Cash is always tight, even when collections are strong, and that alone tells you nothing about whether to borrow. What tells you something is running the three tests above against your actual numbers, not your gut. A law firm that gets this decision structured, rather than instinctual, is the same kind of firm that goes from $5.5M to $18.3M in five years instead of stalling out at a plateau it never quite understands.

If you’ve run the framework and you’re leaning toward evaluating a specific financing option, that’s a conversation with our Debt Advisory Services team. If you’re still at the stage of wanting to test your numbers before deciding anything, the next step is modeling the scenarios that pressure-test your choice, which is exactly what we cover next in this series.