Financing a Law Firm: SBA Loans, Revenue Share, and Bar Rules

Most states' rules of professional conduct restrict a law firm from splitting legal fees with a non-lawyer or giving a non-lawyer an ownership stake or a share of firm profits tied to specific matters. A conventional business loan, including an SBA 7(a) loan, is a debt obligation and generally doesn't raise this issue, but have your ethics counsel review any loan terms that give the lender a say in firm decisions or client matters. A revenue-based financing structure, where a provider collects a percentage of firm revenue until a repayment cap is met, is generally structured as debt as well, not fee-splitting or equity, but the structure can look close enough to a prohibited arrangement that it's worth a direct conversation with your state bar's ethics counsel or your own outside counsel before signing, since rules and how strictly they're enforced vary by state.

Confirm your firm's practice mix, since litigation and transactional work often carry very different cash flow timing, with contingency litigation in particular producing large, lumpy, unpredictable payouts rather than steady monthly billings. Confirm whether your revenue is mostly hourly billing, flat fees, or contingency, since a lender's comfort with each varies. Confirm your trust accounting is clean and separate from operating accounts, since a lender will want to see operating cash flow clearly, not commingled with client funds held in IOLTA accounts. Confirm your personal credit standing if pursuing an SBA loan, since a guaranty from the borrowing partners is standard.

SBA 7(a) loans price on overall creditworthiness rather than revenue predictability, with rates capped by loan size, from 13.25 percent on the smallest loans down to 9.75 percent on loans over $350,000¹. That makes it a reasonable fit for a partner buyout, an office buildout, or financing working capital during a long contingency case, all fixed or dated needs where a bank's underwriting of the firm's overall financial history matters more than isolating a specific recurring revenue stream.

A firm with a steady base of retainer clients or flat-fee recurring work, general counsel-style engagements billed monthly, for example, has revenue that looks more like what a revenue-based financing provider is used to underwriting. Litigation-heavy or contingency-heavy firms will generally find this option harder to get and more expensive, since the revenue pattern a provider needs to model with confidence simply isn't there in the same way.

If your practice mixes both, present the two revenue streams separately rather than blended, since a lender evaluating the recurring retainer portion on its own will generally offer better terms than one asked to model your whole book, contingency swings included, as a single pattern.

A long contingency matter can tie up significant attorney time and case costs for months or years before any payout arrives, and neither a standard SBA loan nor revenue-based financing is purpose-built for that specific gap. Litigation funding, a distinct product where a funder advances against the expected outcome of a specific case, is worth pricing separately for this need rather than trying to stretch general business financing to cover it, and it carries its own set of ethical and disclosure considerations worth reviewing with counsel.

Say a founding partner is retiring and the remaining partners need $600,000 to buy out their stake: an SBA 7(a) loan, typically underwritten against the firm's financial history and the remaining partners' personal guaranties, with a fixed repayment schedule the firm can plan around its billing cycle, is often the more conventional path. Revenue-based financing is rarely used for this kind of transaction, since it's a one-time, fixed-amount need rather than an ongoing capital requirement tied to revenue growth.

Expect a bank underwriting an SBA loan for a law firm to ask for things a typical small business application doesn't cover: the partnership agreement itself, how profits and losses are allocated among partners, and what happens to the loan obligation if a partner leaves or the partnership dissolves. This is worth having your firm's own counsel review before submission, separate from the lender's paperwork, so the partnership agreement and the loan's guaranty terms don't end up in conflict with each other. A firm that brings this documentation proactively, rather than assembling it under pressure once a lender asks, tends to move through underwriting noticeably faster.

Have these ready for a bank underwriting a law firm:

• The partnership agreement itself, since a bank underwriting a law firm will want to read how the practice is structured.
• A clear statement of how profits and losses are allocated among the partners.
• An explanation of what happens to the loan obligation if a partner leaves or the partnership dissolves.
• Confirmation that your firm's own counsel has reviewed the package before submission, separate from the lender's counsel.