Business loans for law firms: funding work in progress, disbursements and partner capital

Here is a puzzle that confuses some new principals. The firm’s trust account holds $1.4m. The office account holds $18k. Payroll is $45k on Thursday. On paper the practice looks rich; in practice it can’t pay its staff without the overdraft.

Every lawyer knows why. Trust money isn’t the firm’s money, and the rules around it are strict. But it explains why legal practices borrow the way they do, and why the conversations with lenders centre on billing, lock-up and disbursements rather than on the balances clients see.

Why doesn’t trust money help a firm’s cash flow?

Under the trust rules that apply to Australian law practices, money held for a client stays the client’s until it is properly withdrawn, for example to settle an invoice the client was sent and had the set window to query. It can’t be used for office expenses, it can’t be lent to the firm, and it isn’t available to the firm’s creditors. Regulators such as the Victorian Legal Services Board + Commissioner treat trust breaches as among the most serious matters they see.

Lenders understand this completely. They will look only at the office account and at what the firm has earned and billed. So a lending proposal for a law firm starts from three numbers:

1. Fees billed and collected over the last twelve months
2. Work in progress: hours logged against matters that haven’t been invoiced
3. Debtors: bills issued but not yet paid

That delay from effort to payment is your lock-up, and it is where most law firm borrowing begins.

Where does a law firm’s cash actually go?

Pressure point	What causes it	Finance that tends to fit
Lock-up in commercial and family work	Long matters billed monthly or at milestones, slow-paying clients	Business line of credit or overdraft
Disbursements on contingency matters	Experts, counsel and filing fees paid years before settlement	Specialist disbursement funding, working capital loans
Professional indemnity premium	One large annual payment	Insurance premium funding
Partner buy-in or retirement payout	Capital contribution or paying out a departing partner’s equity	Term loans, business acquisition loans
New office or second location	Fit-out, furniture, IT and security	Office fit-out funding, equipment finance
Practice management software and hardware	Migration, licences, devices	Equipment finance or a short unsecured loan

How do no-win-no-fee firms fund disbursements?

Personal injury, medical negligence and class action practices often take matters on a conditional basis. The firm may wait two or three years for its fees, and in the meantime it pays medico-legal reports, barristers, investigators and court fees out of its own pocket. A busy practice can have a large sum tied up across hundreds of open files.

Specialist legal finance providers offer disbursement facilities for exactly this. Typical features include a facility limit the firm draws against matter by matter, repayment when each matter resolves, and an allowance for files that are lost. Charges build only on the drawn amount. Some firms pass the cost to the client at settlement, which must be done in line with the costs disclosure rules in their state.

If a dedicated facility isn’t available, perhaps because the firm is new or its matter history is short, a general working capital loan or revolving facility can cover the interim. Lenders will want to see your matter list, average time to settlement and success rate.

How do partner buy-ins get funded?

When a senior associate is invited into the partnership, they usually have to contribute capital or buy equity. That money normally comes from the incoming partner, not the firm, and is commonly borrowed in their own name or through their own entity.

Lenders assess it as a loan to an individual whose repayments come from their share of profits. Expect requests for the latest firm accounts, the partnership or shareholder agreement, a projection of the new partner’s drawings, and a statement of that person’s own assets and debts. Equity in a home often strengthens the application and may bring down the cost. For the reverse situation, a firm paying out a retiring partner, see buying out a business partner.

Need to bridge a lock-up gap or fund a buy-in? Run it past us. Asking is quick and leaves your credit history untouched.

What makes lenders cautious about a law firm?

• Very high lock-up. If work in progress and debtors together represent many months of fees, a lender will ask about billing discipline and write-offs.
• Fee concentration. One institutional client or a single large matter producing most of the revenue.
• Key person risk. A sole practitioner or small firm where one lawyer brings in most of the work.
• Old, unbilled time. Work in progress that has sat for a year may never be billed at full value.
• Tax arrears. Firms that fall behind on BAS or PAYG during a slow period should have an ATO payment plan in place before they apply.

None of these rule a firm out. They just need an explanation and, ideally, evidence of improvement.

How should a law firm prepare its application?

1. Pull a lock-up report from your practice management system, showing WIP and debtors by age.
2. Gather twelve months of office account statements (never trust account statements as evidence of firm cash).
3. Have two years of financials and tax returns ready for the firm and principals if you’re approaching a bank or borrowing a larger amount.
4. For contingency practices, prepare a matter schedule with stages, estimated settlement dates and disbursements spent to date.
5. For buy-ins, provide the partnership agreement and a summary of the capital arrangement.
6. Write a brief cover note on anything out of the ordinary: a big matter that settled late, a partner who left, a move to a new office.

Example: a two-lawyer personal injury practice

A made-up scenario. A small personal injury firm in Newcastle has grown quickly, opening about forty new files a year. It pays experts and counsel as matters progress, and its office account is constantly stretched while fees arrive only at settlement. The bank is supportive but caps the overdraft based on the firm’s last full-year accounts, which predate most of the growth.

The principals use a combination: a disbursement facility from a legal finance provider for medico-legal reports and counsel on qualifying matters, and a modest line of credit for wages and rent during the months between big settlements. Within a year, cash flow is steadier, and the firm’s next set of accounts gives the bank grounds to lift its own limit.

You can model a similar gap with our cash flow gap calculator.

Find out what your firm could borrow

Law firms are in a strong position with most lenders once lock-up and trust rules are understood. Your bank is a natural place to start; if it can’t move at the speed of your matters, or wants more than you can offer, we can help you look further.

Telling us about your practice takes about a minute, and making an enquiry places no mark on your credit report. Nothing is forwarded in bulk to a panel of financiers. Instead, a lending specialist works through your situation, from lock-up to partner arrangements, and then calls to discuss it with you directly. Accuracy matters, much as it does in an affidavit: correct figures for fees and the amount sought mean we can find the right facility without a second go.

Check your firm’s options →