What Banks Actually Look At When They Fund a Law Firm | Courtney Worrell

If we think about those options and the ways that firms are restructuring and changing, how are they funding it? So if we look at this huge systemic change in some areas, AI, talent, what are the funding options that are available to them?

I think options for funding growth within legal firms continues to expand.

And what it means is firms don't have to dilute their equity to access capital that's really transformative for their business.

So I think a lot of law firms think of major capital injections into a firm.

The logical thought at the moment is private equity, and there's a lot of discussion about that.

You and I have had many discussions outside of this podcast around that.

It's becoming a bigger part of the conversation, but I think it's important for firms to remember and be aware that traditional, more structured banking options have definitely evolved.

And as I said, you know, I've seen – many years of banking legal firms.

It's probably in the last five years that we've seen that greatest evolution of what banks are willing to offer to firms.

And so if I look at high performing firms and high performing firms specifically where they're generating over $20 million in revenue, these businesses are actively leveraging their balance sheet.

And it's particularly to fund scale and get scale more quickly than they've been able to do in the past.

And it's to fund technology as well.

So we benchmarked a large cohort of firms across the country just shy of two years ago now.

And what we found was of these larger firms, so that $20 million revenue and above, 75% of them had debt limits greater than 0.5 times their profit.

And more interestingly, almost 40% operated with limits greater than one times their profit.

So these high-performing larger firms aren't scared of taking on debt for the right purposes.

And if I look at, you know, what those sort of structures are and what type of facilities that they're putting in place, it's the traditional term debt, you know, that amortises down over a period, and that's great for new infrastructure within the firm.

It's great for fitting out the premises, moving premises, and, you know, creating a really wonderful place to work.

And that's what a lot of employees are looking for now.

It's also looking at the working capital side of the business.

The firm may have been growing and may have been stagnating, whatever position it's in.

How are they going to fund that from a working capital perspective? And, you know, there's two ways to look at that.

One part is the partner capital contribution loan.

What are the equity partners going to contribute in terms of funding that working capital? And, you know, a A lot of businesses haven't had these in place in the past.

And given the change they're seeing in their firm, they're approaching us and saying, okay, well, what does it look like to actually put this in place and actually put some debt with the partners? But more importantly, I think where we're seeing a lot of inquiry from the firms that we work with is we had partner capital loans put in place 10, 15, 20 years ago.