I am the financial partner with our sixteen attorney firm in Indianapolis, Indiana. The firm has had a rough couple of years. We had several partners leave the firm and they took several corporate clients with them. Unfortunately, this was ongoing consistent retainer and time bill work. While we still have some retainer and time bill corporate work, a much larger mix of our work is now contingency fee work. As a result we have had some cash flow challenges and for the first three months of this year there was no money to pay partner draws. We have a credit line with the bank of $125,000 that we have not used. We only use our credit line for long-term equipment purchases. We would appreciate any suggestions that you have.
A line of credit is designed to be used for financing short-term working capital needs – not long-term financing needs such as fixed asset acquisitions. I would use either leases or long-term bank loans for equipment and other fixed asset financing secured by those assets. This leaves your your credit line available for short-term financing needs. While I hate to see a firm use a credit line to pay partner draws, often there is no other choice in law firms that are not adequately capitalized, especially contingency fee firms. Partners have to eat too. Contingency fee practices can have wide cash flow swings and often have to use their credit lines to temporarily fund payroll and partner draws.
John W. Olmstead, MBA, Ph.D, CMC