Rapid growth. Disaster recovery. Operating considerations. Technology expenditures.
Those are all reasons that you might need a loan in the business of law. Getting a loan involves some groundwork, but if you have a good working relationship with your bank, the process should run smoothly. And if you have prepared properly, you will likely see a desirable result.
When you're ready to request a loan, you need to set up a meeting with your banker. By this time, your banker should have all the essentials to evaluate whether you will receive the loan.
The essentials include your credit score, your "4 C's" of credit profile, business plans and business documentation. Just to be sure, take copies of your plan summaries and important documents with you to the meeting.
You should also prepare a one-page summary, sometimes called an executive summary, stating what you want to use the loan for and how you intend to pay it back. Include all supporting financial information and consider taking your accountant to the meeting, too. Be prepared to show proof of and answer questions about the following:
- Whether your accounting is done on a cash basis (collections and expenses only, which is more common for small firms) or an accrual basis (which also includes work in progress and accounts receivable);
- What your current profit margin is and whether you are implementing any cost-containment strategies;
- How much you have in working capital;
- What your current receivables are and how they reflect your realization rates when expressed as a percentage of booked hours billed and a percentage of billed hours collected;
- Where you stand on your utilization rate, i.e., the percentage of a workweek, usually expressed as an annual average, that you actually bill;
- A listing of work in progress by client, which will become accounts receivable at a future date.
- Make sure that you understand the time frame for approval and that you are clear about all fees involved, including filing fees and other charges. Always request a commitment letter for the loan that the bank agrees to give you.
In general, it is a good idea to ask for more money than you actually need because your loan request can be received in one of four ways:
- You get everything you ask for.
- Your request is granted but for a lower amount than you asked for.
- Your request is granted in full but at a higher interest rate than you expected.
- Your loan application is rejected.
If you've established an effective banking relationship, the latter three eventualities are less likely. But if the second or third alternative occurs, you may have the opportunity to negotiate and compromise by accepting the lesser amount, which is easier to do if you have asked for more than you needed, in exchange for something such as a longer term or reduced interest rate.
The lending process should be the culmination of everything that you have established at the bank and should validate your firm's viability and future growth prospects.
Preparation and groundwork, as in everything else, are critical to the banking relationship. A good banker will make it possible for you to grow your business within the parameters required by both the bank and the federal regulatory agencies.
