Do you want a bank loan? Then make sure you qualify

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Published on 4/24/06

Lawyers may believe that a bank will only lend them money when they don't need it. The reality is that to get a loan you need to establish an ongoing relationship with a bank so that it understands your law firm's business dynamics and is comfortable with your ability to share risk in any transaction.

You might need a loan for any number of reasons: to finance growth, recover from a disaster, meet unexpected expenses or purchase new technology.

Banks often have set guidelines for the kinds of loans they extend to lawyers. These are typical:

  • Line of credit
    The lawyer borrows and repays at will up to the amount of the credit line, which is reviewed annually and extended, increased or terminated as circumstances warrant.

  • Revolving line of credit
    The lawyer obtains a designated sum, which is converted to a term loan, repayable over a period of from two to five years.

  • Equipment term loan
    The amount of the loan to purchase new equipment will normally be no longer than the depreciable life of a law firm's equipment, usually three to five years.

  • Term loan
    These can be as long as seven to 10 years for a large law firm, three to five for a smaller one. Most involve leasehold improvements and furniture and equipment purchases.

Bankers view and understand any law firm as a business, with cash flow, receivables, revenue and profits. Lawyers should educate their bankers on how their business operates in order to build a relationship of trust.

That means documenting clear plans for cash and receivables management, marketing and business growth. It means establishing your qualifications under the "Four Cs" test (character, capacity to repay, capital and collateral).

And it means scoring high on the FICO scorecard, which estimates your default risk based on your history of borrowing and repaying money. The national median FICO score is 720, with 800 being perfect.

The best assurance of getting a loan is a good relationship with your banker, but there are practical steps to improve both that relationship and your score:

  • Don't pay late;
  • Don't use more than 50 percent of your credit limit on any one card, even if you pay monthly;
  • Don't close inactive accounts - losing a line of credit increases your overall credit usage ratio;
  • Maintain a long-lived account, which increases your score;
  • Use your account at least once a year - dormant accounts don't count much;
  • Don't apply for smaller credit cards or loans when you apply for a large loan in the same year; and
  • Use no more than three to five cards, supplemented by a diverse debt portfolio.

Request a loan in a meeting with your banker, who by that time should have all the essentials to evaluate whether you will receive it: credit score, 4Cs profile and business plans.

Prepare a one-page summary stating what you want to use the loan for and how you intend to pay it back. Ask for more money than you actually need, in case you have to negotiate and "settle" for a lower amount (which you really wanted).

Emphasize the business soundness of your practice, the safety of the loan, the security that it will be paid back.

The lending process should be the culmination of everything you have established at the bank, validating your law firm's viability and future prospects as established in your credit score and 4Cs evaluation.

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