Is a law firm bankable?

Two different businesses under one shingle

A firm billing hourly against engagement letters produces something a lender recognizes: work in progress that converts to receivables that convert to cash on a reasonably predictable schedule. That is exactly the profile a revolving line exists for.

A contingency practice produces something else entirely. Revenue arrives in irregular, large, unpredictable amounts, sometimes years after the cost is incurred. Nothing about that is a bad business — it is simply not a cash flow a bank revolver is designed against.

Realization is the number that separates good firms from busy ones

Hours worked, hours billed, and dollars collected are three different numbers, and the gaps between them describe the practice better than revenue does. A firm with strong billings and weak realization is writing off work — through discounts, write-downs, or receivables that quietly age out.

Bring realization rate and average collection days. A firm that tracks these reads as well-managed before anyone looks at the P&L.

WIP is your borrowing base, and most firms undercount it

Unbilled work in progress is a real asset. Lenders extending against a professional services firm look at WIP plus A/R and apply advance rates, discounting older WIP heavily because the collection odds fall as it ages.

• Current WIP, billed promptly, carries the best advance rate.
• Aged WIP — work performed months ago and still unbilled — gets discounted sharply, and rightly so.
• A/R past 90 days is usually excluded from the base entirely.
• Trust and IOLTA balances are not yours and never count toward anything. Expect this to be checked.

Contingency practices need a different product

Case cost financing exists precisely because contingency firms fund expert witnesses, filing fees, depositions and medical records years before any recovery. It underwrites the case portfolio rather than the firm's earnings, which is why it works where a revolver won't.

It is specialty capital and it is priced accordingly. Read the terms carefully, particularly how costs are recovered on cases that resolve for less than projected or not at all.

Partner buy-ins and acquisitions are strong SBA files

Buying into a partnership, buying out a retiring partner, or acquiring a book of business from a firm that is winding down are all legitimate SBA 7(a) uses, and law firms underwrite well for it: recurring client relationships, licensed profession, low failure rates. The goodwill problem is the same as in dental and veterinary work — conventional lenders won't finance it, and the SBA guarantee is what makes it possible.

Where law firm files get declined

• Contingency-dominant revenue with no predictable base to service a monthly payment.
• Cash-basis books. On a cash basis WIP is invisible, which erases the asset you would be borrowing against.
• Aged, uncollected A/R masking realization problems.
• Partner draws mixed with operating expense, making true firm profitability impossible to compute.
• Trust account irregularities. An immediate stop everywhere, for obvious reasons.