Starting a new injury law firm is a daunting task. You’ve got overhead, salaries, a boatload of case expenses and oh yeah, your fees come in drips and drabs. It’s enough to make any young lawyer join a law firm for the safety and security of a weekly pay check.
But with all of the stress and anxiety of owning your own law firm, there is one thing that outweighs all of the negatives: the satisfaction of knowing you’re doing this for you and your family—not for someone else. Rather than working your butt off to make someone else rich, you’re doing it for yourself and that feels damn good. And when that first big check comes in, you realize you made the right choice. That’s right, there’s enormous satisfaction (not to mention happiness) in owning your own law firm.
And let’s face a simple fact: when you work for someone else, even if you are an equity partner with less than 50% ownership, you always run the risk of being fired. Maybe the partnership dissolves or the senior partner had a bad day and wants to get rid of his junior partners, but whatever the circumstance, there is a very strong chance that at some point you will be shown the door when you work for someone else.
Your Best Financing Options
Owning your own law business is the only option that really makes sense for your long-term future. Okay, then, let’s explore some financing options for opening your own law business. Your financing options for your new law business include:
- Credit cards,
- Bank financing,
- Legal fees,
- Personal savings
It is always best to finance your law firm through fees. You’re not tapping into your 401(k) or investment funds, and you’re living off the income/fees you make. You estimate your law firm’s budget for six months and you pay your expenses from the income and fees that you earn.
Get a Line of Credit with a Local Bank
But the life of an injury lawyer can be a lonely one and you won’t always have enough income and fees to pay your expenses–you need a back-up plan. A line of credit with a local bank will give you access to funds when your operating account is low on cash.
Use a local bank in your community to get a line of credit. You will rarely get a line of credit on the first try, but a “no” is an invitation to try harder (i.e., the founders of Infusionsoft were rejected no their first 25 attempts to secure bank financing).
Avoid Credit Cards!
You should not use credit cards to finance your law firm. Credit cards usually have ridiculously high interest rates and you’re spending your hard-earned cash to pay down interest every month. A commercial line of credit will give you a much lower interest rate, i.e., 5-6%, than any credit card on the market. Avoid credit cards if you can!
You should avoid the temptation to tap into your personal savings, i.e., your 401(k), college fund for your kids and your long-term investment savings. You can be hit with penalties and taxes with withdrawals from retirement, pension and 529 accounts. Your savings should be off-limits for funding your new law firm.
Let a Third-Party Lender Pay the Case Expenses
In New York, lawyers are ethically permitted to borrow case expenses from a third-party lender and be reimbursed for the borrowing cost from your clients at the end of the case. There are big advantages of hiring a third-party lender to pay case expenses:
- You won’t have to spend another penny on case expenses,
- The borrowing costs of the lawsuit are incurred by your clients (where they should be), rather than your savings,
- You can set aside your extra cash for marketing your law business (or taking your dream trip to Fiji),
There are quite a few companies that specialize in financing case expenses for plaintiffs’ lawyers. Advocate Capital is the leader, in my humble opinion, in case expense funding for plaintiffs’ lawyers (and a top supporter of the American Association for Justice). Advocate Capital’s CEO, Mike Swanson, and his great team at Advocate Capital can help free your cash flow, so you can spend dollar-for-dollar against the highly financed insurance industry and never have to worry whether you can afford the best experts.
Hire a Bookkeeper and Financial Manager
First, hire a bookkeeper to prepare a balance sheet and profit and loss statement. You will need a business plan and financial statements. Budget your expenses and estimate your annual income. Your bookkeeper will become invaluable.
Meet with your bookkeeper at least once every 2 months and review the balance sheet and profit/loss statements with her. If you’re not meeting your financial goals, have your bookkeeper show you where you’re falling short.
Consider hiring a Chief Financial Officer for the financial management of your law business. Dave Bittner of Beanstalk Financial is an excellent advisor for financial management for business owners.
Keep Score of Your Net Worth (Like Warren Buffett)
Your financial worth is your net worth, which is what you own minus what you owe. The question is: Do you know your score?
Keep a personal balance sheet, a worksheet for tracking your net worth. Focus on your net worth and track it over time. The wealthy are conscious players of the financial wealth-building game, they play it strategically and keep score by carefully watching their net worth.
Invest your money in you practice—not expensive cars. Be very frugal—don’t buy expensive cars. (I drive a used 2009 Prius with 178k miles and my wife drives a used 2011 Prius with $152k miles). New stuff quickly becomes old stuff, creating the need for new stuff, i.e., “Keeping up with the Joneses”. The spending never ends, but the joy of it does.
Remember, the $5 that you spend today could have been $25 in 30 years. The wealthy think of money in terms of the hidden cost of money, namely, money spent today will result in the absence of money that would double or triple in 10-15 years. This is why the richest man in the world, Warren Buffett, lives in an average house in Kansas—a fancy home does nothing to build his wealth. You want to have the mindset of the richest man in the world!
Be Transparent with Your Staff
Every employee knows revenue and income. Put revenue and income on a poster-board in the office and be transparent with the numbers. Your team will appreciate your transparency and you’ll be rewarded with a more committed team that is devoted to your success.
And when you’ve got extra money at the end of the year, consider creating a bonus pool that is funded by company performance, rather than individual performance. The bonus money can be divided on a pro rata basis for each employee based upon the ratio of their salary to the total salary of your employees.