Funding a New Start Law Firm

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What To Consider When Funding a New Start Law Firm

Whether you are setting up from scratch or starting a break-away practice or management buy-out with colleagues, having a clear picture of how you will make the firm profitable is always the cornerstone to starting any new venture. Whilst profitability may not be your main objective in setting up your own law firm, it’s certainly extremely important to be able to illustrate this for the purpose of raising debt or equity finance.

You must be able to demonstrate this to would-be funders or investors if you wish to raise this debt for the new company.

Or alternatively, you want to remortgage existing property to achieve the funding that you require. On the basis that your objective is to raise funding on the future potential of your firm underwriters will need to see that you can meet finance repayments. You will also need to demonstrate that you (as well as any other founding members) can make a living from it or have sufficient personal reserves to sustain yourself in the early days. Finally, there must be an element of additional capital within the business as a reserve should you have a couple of lean months within the start-up phase.

To give yourself the best chance of raising finance and at the most advantageous cost of funds, you should have the elements below in place:

Business Plan

Ensure that you cover each area of consideration and calculate for all eventualities when creating your business plan. When a funder or finance broker considers your application they will be analysing the level of detail within the plan. This not only illustrates you’ve spent time considering all eventualities but that you have robust responses to any potential difficulties envisaged along the way. Some areas to consider are: 

  • What legal services you’re planning to offer
  • How you will obtain work from clients
  • Where your funding will come from
  • PII cover
  • Where you will be based
  • Risk management
  • Details of the management team
  • Startup capital that you are willing to invest personally
  • How you propose to deal with SRA compliance
  • Will you be bringing any clients with you
  • Average monthly levels of billing in prior employment
  • Specialisms and distinctions within certain sectors
  • SRA approval
  • Compliance with accounts rules
  • Tax issues
  • Contingency planning

Cash-flow Forecasting

It’s imperative to create a realistic cash-flow forecast so you can see exactly how much capital it will take to set up and run your law firm.

It is also important to budget for a slow build-up of income. Even with the best business model, it takes time to generate new business and get paid for the work that you and your team undertake. Both the SRA and any finance providers will want to see sensible forecasts for the anticipated cash-flow of the firm.

You will also want to know that your law firm will be viably profitable and that you have enough to start the business and sustain both it and yourself during the early days.

Creating a cash-flow forecast will help you drill down on the relevant costs and time scales for when you’ll be billing a reasonable level of income to sustain costs. It will help form the basis of your business plan, which you will undoubtedly go back and amend once you’ve delved into the financial analysis. Whilst this might be time-consuming, it’s such an important exercise for both you and anyone you approach to raise funds.

Finding the right funder or making contact with an FCA certified Finance Broker specialising in the legal sector

So you have your business plan. It’s been hashed and rehashed until you are at the point where you feel extremely confident to present it to prospective lenders or, potentially, a funding partner who can help you to access the relevant funding required.

In short, high street banks these days are not the quickest to organise any funding, never mind for new start businesses. So if you wanted to avoid the high street banks, you could either speak directly to a challenger bank or independent finance house. There are a number of options out there but it can take time to go round the houses. It may be worth engaging with a trusted finance broker specialising within the legal sector (us!) as they have access to multiple lenders. They should also know those who will consider new starts.

A broker should help you package the proposal correctly, review your business plan, and create a detailed summary to go alongside your supporting info. They can, if needs be, organise funding from multiple sources to achieve a higher advance than any single funder may be able to approve. And a good broker should also be working with a few lenders who aren’t accessible directly.

In addition, you may need to provide personal bank statements for the last six months, Asset and liabilities statements and possibly income and expenditure statements to fully support the application. A good broker will have templates for all of these, which can be completed electronically.

Generally, decisions should take around one week for a new start application but may take longer if the deal has been presented to multiple lenders.

Interest rates vary dependant on the lender, but we typically see rates for new starts from between 7% – 15% depending on the amount, the term of the loan, credit-worthiness of equity directors, the strength of business plan, level of startup capital being injected by the equity directors/partners.

I hope this article has helped you to create a clear picture of how to make your new start law firm profitable. If you’d like see how Acorn Business Finance can help you to achieve your business goals, ring us on 01242 395 507 or email us at hello@acornbusinessfinance.co.uk.

Author: Stuart Gibson, Acorn Finance

Acorn Business Finance looks to offer a far more positive, enabling approach when it comes to commercial finance and advises on how emerging and expanding businesses can look beyond their bank for funding.

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