Funding & Financing a New Law Firm
How to Start a Law Firm
9 min read
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Inevitably, the first question we hear from lawyers is: How much does it cost to start a law firm? And the second question is: How do I find law firm funding?
Let’s start with this: If you’re coming from a big firm, don’t apply big firm financing philosophies to your small firm. You will hemorrhage money if you hire a huge staff, buy expensive tools, and flash out your office as your first steps.
Gone are the days—especially we the world goes more remote—of needing a luxurious-feeling office space to impress your clients. In fact, we’ll wager that if you are client-centered, an accessible space versus luxurious is more important. (More on that later.)
So readjust your mindset to fund on a smaller scale.
And before you start throwing out cash—before you start even looking for funding at all—let’s get a strategy in place.
Any healthy business, including law firms, should have a written plan to forecast revenue, expenses, net profit, and cash reserves. But first, you need to know what start-up funds you have available and your financial goals.
I know: You’re just starting. Who can think about five years from now? But we want you to relax and dream a little. You’re planning your financial strategy right now so you can smartly figure out what kind of funding you need to start your firm. You’re not locked into these numbers. They will change as you change and grow.
First, you must consider where you want to be in one year, three years, and five years from now. Once you visualize those goals, you can start outlining the steps you’ll need to take to get there—the backbone of your financial strategy.
Think about his: One December 23rd, an exasperated attorney called Lab Coach Stephanie, frustrated that the associate he had spent so much time training had just given notice. “Listen. I just want to practice law and maybe do some business development work. I don’t want to deal with all this other stuff!”
This attitude is just fine—if you’re working within a firm you don’t own. But, owning a business will require you to deal with “all the other stuff.”
Are you ready to take on those challenges?
Hot tip here: Since you’re in the beginning stages, these are wishlist numbers. You will adjust these numbers as you get a handle on your funds. You want to balance reality with dreams here.
To figure out your goals, take a look at your lifestyle (your bills, your family, your hobbies, etc.). What amount do you need to continue your current lifestyle? What amount would you need to improve your lifestyle by, say, 25%? Write down those numbers.
Then, ask yourself:
What’s the bare minimum I could make and still survive?
What’s the best-case scenario, profit-wise?
What savings, assets, and potential for loans do I have access to cushion me as I start?
Got a general idea sketched out?
Let’s dive deeper into where to get that funding.
Beyond your own savings or nest eggs, most lawyers get law firm funding from credit and loans.
Personal Cash: How Much Should You Use?
To open your own firm, you’ll need some initial cash to deposit. You’ll need to have enough set aside to run your firm while understanding you may not make much money for several months. We recommend using the cash from your own personal savings so you have some skin in the game, which will help keep you dedicated to your initiative.
Whatever you do, don’t drain your personal savings. You still need personal funds set aside for life outside of your firm.
To estimate what you’ll need for starting out, look at your budget or what you estimate you might use until you start generating sufficient working capital within your business. Set this amount, plus a bit of cushion, aside to get you started.
If you can demonstrate long-term profitability, you have options.
A line of credit is typically offered by a bank or credit union. It gives you access to money as you need it, and you can draw up to a maximum amount for a set period of time. Lines of credit are flexible, allowing you to continuously borrow the funds you pay back. You also don’t pay any interest until you borrow.
Business lines of credit are often unsecured, which means you don’t need to put forth any collateral to secure the credit. These typically come with higher interest rates, however. Lines of credit are best for short-term projects such as office renovations or upgrading your equipment.
Credit cards are similar to lines of credit, with a few key differences. For example, a credit card doesn’t have a draw period, so you can use it as long as the account is open. If you want actual cash in hand (like you’d receive from your line of credit), you’ll need to perform a cash advance on your card. This often comes at extremely high-interest rates, which can cost you.
Speaking of higher interest rates, credit cards come with higher rates than the other lending options listed here. With some cards, you may be able to pay the balance off each month and avoid interest charges. That makes them an often ideal choice for day-to-day spending within your firm.
Small business loans are tailored specifically for business owners just getting started. In general, we recommend avoiding small business loans for law firm financing or funding. Typically, these loans require you to leverage your own home or other assets to secure it, bringing a fair amount of risk to the table.
Although loans from friends or family may come with the added benefit of a low-interest rate, they often come with strings attached that can strain a relationship if you don’t pay it back on time. Before you reach out for help from a friend or family member, seriously weigh your comfort level with the relationship.
Although credit cards and loans are available, you should only use them if you are confident in your profitability. If you can demonstrate that you will have the cash on hand later, feel free to access the credit if you need. If you’re not sure when you’ll have the money to pay your debts, though, accessing credit or loans may not be the best option for your firm.
But also, think about this: It takes far less to open a law firm than you think. We polled our Lawyerist Facebook group members on how much start-up capital they had when they opened their firm and they said:
Overwhelmingly, most attorneys had less than $5k in the bank when they started. So it’s possible, but let’s break it down.
Keep in mind these are guidelines—not hard-and-fast rules. Let’s dig in.
In addition to the money it will take to get your business off the ground (we’ll cover those next), you’ll need to keep yourself housed and fed. It may take a while for your business to be in a solid position and pay you a salary or distribution. You should have some money saved to cover your living expenses for the first 3-6 months.
When you start a legal practice, you will need to spend some money at the outset—it isn’t optional. According to our experience and data over the years, $3,000 is an okay starting point, but $5,000 to $15,000 is more realistic when opening your first law firm. The cost depends on a wide range of variables such as location, practice area, advertising, and more.
We’ll cover the basics and some areas that you may cut for the time being.
The office comes first (as it is often your largest expense outside of salaries). The good news is that this an optional expense. One thing the global pandemic taught everyone is that running a firm out of your house with a desk, a computer, and a few boxes is doable Whatever gets you started, do it. Don’t waste too much time finding the perfect office space before getting started. You can get caught up in buying furniture, technology, and supplies very quickly—and soon discover that you’re drowning in minutiae and overhead.
Many more attorneys are finding success with a virtual practice. This is an excellent option because it keeps your overhead low and allows you to determine how much space you need before you lock yourself into a long-term lease. If you plan on securing a physical space, give yourself a buffer and a timeline. A standard timeline is to arrange to have a space and rent money 6-12 months after starting your practice. Do whatever feels right to you.
As you purchase office supplies, only buy what you need. We’ve all gotten excited about a new space and bought fancy chairs and expensive espresso machines and art and on and on. Buying cool office decor can be a great distraction from working on your actual business plan. Don’t fall for it!
Try to rein in the urge to make your office look expensive. If you have transparent, client-centered services and a human touch, your clients won’t care what your office looks like.
Plan for professional expenses such as licensing, continuing legal education, conferences and events, malpractice insurance, and memberships. Both licensing and legal education aren’t optional. You’ll also need different types of insurance.
In your office space, you’ll need a computer, backup service, document scanner, and a phone or phone service.
Legal software and online services will be the tools you use the most daily in your practice. Caveat: Don’t rush into buying any of these items until you’ve made a list of what tasks you’ll need done and how you’d like those tasks to flow through the day. (We call these workflows.) We’ve all seen lawyers jump into buying new tech without figuring out how they’ll use it first.
Once you have that plan, consider:
At some point, you’ll want to think about your marketing budget, but in the beginning, it’s OK to stick to the freebies, like setting up social media accounts, referrals from friends and colleagues, and setting up a basic, free website with your information on it. When you’re ready to jump into marketing in-depth, check out our guide to Legal Marketing.
Got a handle on the basics of funding and financing? Then let’s move to your next step: Your business plan.