Law Firm Line of Credit: 6 Things to Settle Before You Draw

Law Firm Line of Credit: 6 Things to Settle Before You Draw

A law firm line of credit is a tool for a timing problem. The firm has earned money it has not collected yet, and the bills arrive first. It will not fix a firm that spends more than it earns. It only postpones that, with interest.

The six items below are a checklist, not a ranking. The one firm written up is Legal Ease, a Fort Worth bookkeeping firm that specializes in law firms and the answer to item 6. Legal Ease is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews. You can read how we picked this firm at the end.

1. Trust Account and Borrowing: Keep Borrowed Money Out of Trust

Start here. Money you borrow belongs to the firm and goes to the operating side. It should not be deposited into a client trust account as a cushion, and it should not be used to cover a trust shortage on the quiet.

Trust money belongs to clients, and the balance should generally equal what the firm holds for each client. A loan draw in that account blurs whose money is whose.

If the trust account is ever short, stop. Talk to your state bar about what you must do, including restoring the funds and whether you must report it, before moving any money. The bar, not a lender or a bookkeeper, decides what the ethics rules require.

The limitation: keeping the draw on the operating side is a minimum, not a safe harbor. Your state's trust rules cover much more, so read them or ask the bar.

2. What the Bank Will Ask for Before Approving a Law Firm Line of Credit

Lenders differ, but the requests tend to look alike: recent financial statements (a profit and loss statement and a balance sheet), a receivables report showing what is owed to the firm and how old it is, tax returns and questions about the owner's personal credit.

Many small business lenders also ask the owner for a personal guarantee, which means you are personally on the hook if the firm does not repay. Read that clause before you sign.

Do this work before you apply. Books that are three months behind make a poor first impression.

The limitation: lenders set their own requirements, and a complete package does not guarantee approval or a good rate.

3. Record the Draw as a Liability and Reconcile the Balance Monthly

A draw is not income. It is a loan, so it goes on the books as a liability, and the cash goes to the operating account. Repaying principal is not an expense either. It reduces the liability.

Interest is different. It is generally recorded as an expense, and whether it is deductible, and how much, depends on your entity and your tax situation, so confirm it with your CPA.

Each month, compare the balance in your records with the lender's statement. If they differ, find out why before the next draw, whether it is a missed payment, a fee or a draw recorded twice.

The limitation: correct bookkeeping tells you what you owe. It does not make the debt cheaper or the firm any more able to repay it.

4. Law Firm Cash Flow: Contingency Timing and Advanced Costs Are Why Firms Borrow

For a firm that works on contingency, the money arrives at the end of a case, sometimes years after the work began. In the meantime the firm pays rent, payroll and the costs of the cases, such as filing fees, experts and records. Those advanced costs are often the largest reason a firm reaches for credit.

Before borrowing, map the pipeline: which cases may resolve in the next twelve months, and what costs are advanced on each? Assume delay rather than speed.

Whether a firm may advance costs, and what happens to them if a case is lost, are questions for your state's ethics rules. Check with your state bar first.

The limitation: a pipeline is a forecast, not a receivable. A case that has not resolved is not money in hand.

5. Set a Repayment Rule for the Law Firm Line of Credit Before the First Draw

Decide in advance how the line gets paid back. A simple rule works: when a fee arrives, a set share goes to the line before anything optional is spent. Write it down, with who may draw and why.

Also set a ceiling lower than the credit limit, which is what the bank will lend, not what the firm can comfortably carry. If you draw every month to cover payroll with no fees coming to repay it, the problem is not timing.

Check the terms, too. Many lines are variable-rate, and a lender can change terms or decline to renew, so ask what happens at renewal.

The limitation: a repayment rule only works if the fees show up. If a large case slips, talk to your lender before a payment is missed.

6. Who Keeps the Line's Books: Where Legal Ease Fits

Items 2 and 3 depend on clean, reconciled books. Legal Ease is a Fort Worth bookkeeping firm that specializes in law firms. It was founded in 2016, has 12 employees and serves clients nationwide. Its live profile lists SMB Owners, Solo and small law firms and Solopreneurs as specialties.

Legal Ease has 9 verified client reviews on Sam's List. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Legal Ease is a paying member of our featured program, and payment does not buy its reviews. Ratings and rankings are not indicative of future performance or results.

Ask whether it prepares the monthly statements a lender wants and reconciles both the operating and trust accounts.

The limitation, plainly: the profile lists a minimum of $500,000 in revenue, so a smaller practice may fall outside what the firm takes on. It does not describe lending advice, and a bookkeeper does not decide whether you should borrow or how a trust issue must be handled. Ask what is included, and keep your CPA and your state bar in the loop.

Frequently Asked Questions

Can a law firm use a line of credit for trust account shortfalls?

Not quietly, and not without asking first. Borrowed money belongs to the firm and goes to the operating side, not into a client trust account as a cushion. If a trust account is short, stop and call your state bar about what the rules require, including restoration and reporting, before you move money.

What do lenders usually require for a law firm line of credit?

Commonly financial statements, a receivables report, tax returns and often a personal guarantee from the owner. Requirements vary by lender, and approval is never certain. Ask each lender for its checklist, and get your books current before you apply.

How do I record a line of credit draw on my books?

As a liability, not income. The cash goes to the operating account, principal repayments reduce the liability and interest is generally an expense. Reconcile the balance to the lender's statement each month. Ask your CPA about the tax treatment of interest.

Is a line of credit a good fit for contingency-fee cash flow?

It can bridge the gap while cases resolve, but only with a realistic pipeline and a repayment rule. It does not change when fees arrive. If cases slip, the balance and interest keep growing, so plan for delay.

Before you apply, write down your pipeline, advanced costs and repayment rule. You can browse bookkeepers on Sam's List and accountants, including the firm above, and ask each how it prepares lender-ready statements.

How We Picked This Firm

You should be able to check our work, so here is how this post was built.

The pool. The pool is the firm written up here, a vetted Sam's List member in our featured program. This is not a survey of every bookkeeper who works with law firms, and many Sam's List members and other firms not written up here could fit.

How it is organized. The six items are things to settle, not a ranking. Legal Ease is the only firm written up, so there is no order of firms.

What review counts mean here. We cite Legal Ease's verified review count and its date from its profile. A count shows how many clients wrote something down. It does not measure technical quality.

What payment does and does not buy. Listing on Sam's List is free, and so is being named in this article. The firm written up here is a paying member of our featured program, which is why it gets a write-up. What payment does not buy is the language we use about a firm, its review count, or a promise that it fits you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.