A profitable firm can still miss payroll when collections lag, and fixed expenses come due together.
A revolving credit line bridges that gap, and interest applies only to the amount you draw.
The key is to size the facility based on receivable delays, respect trust accounting rules, and monitor lender covenants every month.
Key Takeaways
Use a line to smooth timing, not to cover weak economics or trust account mistakes.
- Interest accrues only on drawn funds, which keeps short-term borrowing efficient.
- Most banks advance 70% to 85% of eligible receivables, not your full aging.
- Trust and client trust balances cannot secure the line or repay the lender.
- Smaller facilities usually require personal guarantees from equity partners with ownership.
- Cash cycle math gives a better limit than instinct because it ties borrowing to delay.
- Monthly covenant checks prevent technical defaults that can freeze draws.
Firms with strong billing discipline usually need smaller lines and get better pricing from banks today.
What Is a Business Credit Line for a Law Firm?
This facility gives you reusable working capital, but it must stay tied to operating cash.
A revolving line lets your firm draw up to a set limit, repay from collected invoices, and borrow again. Pricing is usually variable and based on prime or another bank benchmark plus lender margin.
Law firms face one rule that matters more than any rate term. Client trust money must remain segregated, so draws, deposits, and repayments belong in the operating account only.
Some banks also require frequent reports or a controlled collection account, but legal practices should confirm that no cash control reaches trust balances.
Why Law Firms Face Unique Cash Flow Gaps
Legal work gets paid late enough that healthy firms still need a cash buffer.
Clio’s 2023 Legal Trends report shows a median realization lockup, the time from work to bill, of 38 days and a median collection lockup, the time from bill to cash, of 45 days.
Together, those delays create an 83-day gap between work performed and cash received.
Payroll, rent, software, insurance, and expert costs still have to be paid during that gap.
Types of Lines Suitable for Law Practices
The best structure depends on what you need to fund and what collateral you can document.
A bank revolving line secured by accounts receivable is the standard option. The lender files a UCC 1 financing statement under Article 9, the commercial law that governs security interests, and then advances a share of eligible invoices.
SBA CAPLines, the 7 a Working Capital Pilot, case cost lines, and small unsecured lines can also work. ABA Model Rule 1.8(e) allows lawyers to advance court costs and litigation expenses, which makes a separate case cost line useful for firms that carry large disbursements.
Sizing the Limit With Lockup Math
You can size the line with a simple formula instead of a guess. Start with monthly operating expenses, multiply by total lockup in months, and subtract your cash cushion. If the firm spends $350,000 each month, carries 2.7 months of lockup, and keeps $150,000 in reserve, the result is about $795,000.
Every seven days you remove from lockup cuts the needed limit by roughly one quarter of monthly expenses. Faster billing, faster trust transfers after fees are earned, and easier payment methods all help.
Rates, Fees, and Borrowing Base Mechanics
Your real borrowing capacity is set by both price and eligibility, not by the stated limit alone.
Most lines are priced at prime or SOFR plus a spread. Interest runs only on the outstanding balance, while many banks also charge an unused line fee of 0.25% to 0.50% on the undrawn portion.
The borrowing base is the formula that converts receivables into availability. Lenders usually exclude invoices older than 90 days, concentrated exposure to one client, and disputed bills, then apply an advance rate and reserves to the balance that remains.
Covenants, Cleanup, and Compliance
A cheap line can become useless if you miss reporting dates or violate a technical covenant.
Common covenants include minimum debt service coverage ratio, or DSCR, maximum leverage, current financial statements, and current tax payments.
The debt service coverage ratio compares operating income with required debt payments, and many banks want at least 1.20x while SBA programs commonly start at 1.15x.
Some agreements also require a yearly cleanup, which means paying the revolver to zero for 30 to 60 days. That proves the line supports working capital instead of permanent debt, and the payment must come from operating funds, never from trust.
Alternatives: When a LOC Is Not the Right Fit
Use a revolver for recurring timing gaps, not for every financing problem.
SBA term loans fit long-term needs such as office buildouts, equipment, or refinancing expensive debt. Fixed payments match assets that deliver value over years, while revolving credit fits short cash swings.
Factoring and merchant cash advances can provide speed, but the cost and repayment pressure are higher.
The CFPB notes that merchant cash advances rely on future receipts or fixed withdrawals, which can create hard daily sweeps and weak price transparency.
If your need is a one-time office buildout, a term loan is simpler and easier to budget than a revolver that must be monitored every month.
Compare Options and Next Steps
Good preparation improves terms because lenders trust firms that know their numbers.
Start by mapping monthly expenses, lockup, seasonality, and client concentration. Then gather three years of tax returns, a current accounts receivable aging, malpractice coverage, and recent financial statements before you approach lenders directly.
Ask each lender how it treats a single client that represents more than 25% of receivables, because that concentration can shrink availability faster than you expect.
Compare advance rates, fees, cleanup terms, guarantees, and reporting burden side by side. Ask how each lender handles trust accounting boundaries, partner guarantees, case costs, concentration limits, and the reporting cadence your firm can realistically maintain during busy months before you decide.
If you want a lender that understands legal practices, consider Redline Capital’s line of credit and ask how its underwriting handles trust accounting, case costs, and partner guarantees.
FAQ
These answers cover the questions lenders and managing partners raise most.
Can a law firm use trust account funds to repay a credit line?
No. Client funds held in trust remain client property under ABA Model Rule 1.15, so repayment must come from earned fees after they move into the operating account.
What DSCR do lenders expect from a law firm?
Expect a common floor around 1.15x to 1.35x, depending on program, collateral, and guarantor strength. Calculate DSCR by dividing annual operating income by annual debt payments.
How quickly can a law firm close on a credit line?
Traditional bank lines usually close in three to six weeks, and SBA-backed lines may take longer. Specialized legal lenders can move faster when the receivable aging, tax returns, and partner approvals are ready.
Are personal guarantees always required?
Usually, in smaller facilities. Partners should check buy-in, retirement, and separation agreements to guarantee exposure is clear before they sign.
What is a borrowing base certificate?
It is a monthly report that lists gross receivables, ineligible balances, advance rates, reserves, and the credit still available. Clean reports depend on an accurate aging tied to the general ledger.
