The time may come when your firm needs a temporary financial boost. A common occurrence, to be sure, but you won't get something for nothing — certainly not from a bank.
If you need a loan, you can expect the bank will want to see certain paperwork and discuss certain topics. Let's split them up into two basic categories: documents and issues.
While there certainly will be other forms and topics that arise during the loan process, the following seven documents and 10 issues undoubtedly will be required. Make the process easier on both you and the lender by having them ready for presentation. First, the documents:
- Partnership agreement
- Annual fiscal year-end statements prepared by an accounting firm acceptable to the bank (two to five years' worth)
- In-house quarterly statements after the last year-end statement
- Aged accounts receivable schedule
- Cash flow projection, sometimes considered to be an annual budget (for the next 24 months)
- Principals' personal financial statements, net worth, and tax returns
- Firm tax returns (two to five years' worth)
Additional documents such as business interruption, disability and life insurance policies also may be required; further, those instruments may have to be assigned to the bank as additional collateral to secure the payment of the loan.
In addition to the documents, be prepared to discuss these "top 10" issues that complete the picture of your law firm's viability and future growth prospects.
- Financial statements
Are your statements prepared on an accrual or cash basis? Most statements are prepared on an accrual basis; be sure that your banker understands the difference between the two. If the law firm's financial statements are prepared on a cash basis, be sure to submit schedules of liabilities (e.g., accounts payable) and accounts receivable, neither of which will show up on a cash-basis financial statement.
- Capital adequacy
How much of the law firm's capital is permanent? What are the pay-out and pay-in policies of the firm?
- Hidden assets
Are there any hidden assets of the firm such as a lease that has increased significantly in value? Are there significant numbers of billable hours that have not yet been billed? Are there contingency cases that are ripe for settlement or promise to be winners in a forthcoming trial?
- Billing practices
What are your billing rates? How do they compare with the industry? How frequently are statements delivered to clients? What are the aging, reserve, and write-off policies of the firm? How quickly (turnover rate) are receivables collected?
- Litigation risk
Does the firm carry an errors and omissions insurance policy? What are the deductible and premium?
- Cost controls
What is the gross profit margin of the firm? Are there any major cost-containment programs in effect? Are there any major cutbacks or expansions planned in the near future?
- Partner control
Does any single partner or group of partners control a significant percentage of the firm's business? Does any single partner control the business decisions of the firm?
- Client base
What type of client is attracted to the firm? Is the client relationship based on transaction or familiarity with the lawyer or law firm? Is the firm focused on one area of practice, or is it a diverse practice?
- Management
How is the firm governed?
- Financial strength
Review ratios of liquidity, leverage and debt capacity, as well as profits per partner and revenue per lawyer.
