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Solos Should Create a Partnership — With Their Banker

by Edward Poll

July 2006

The traditional attitude of many solo practitioners is that they can go it alone, but the truly successful solo practice requires teamwork – with your clients, your assistant and your professional service providers. One crucial team member that far too few solos take full advantage of is their banker.

 

Banking Relationship

Some lawyers tend to visualize bankers as adversaries, willing to lend you money only when you don’t need it. The reality is that lawyers and law firms are generally attractive customers for banks desiring to grow. Banks value lawyers as having good financial prospects, relatively low risk and good potential for new business referrals. Banks and law firms can develop mutually beneficial and effective business relationships if they work at them.

From the solo’s standpoint, a bank can be a valuable partner in helping you manage the business side of your practice. But just as not every lawyer can properly represent every client, not every bank is appropriate for every lawyer. Solos should look for a bank that gives them the types of services and responsiveness they want. Think of the bank as a supplier. Suppliers provide lawyers with goods and services that allow the law firm to deliver quality legal services to clients. Good banking relationships provide the necessary funds and financial services that allow a firm to grow. There are three key service areas where this is especially the case for solos and small law firms: Cash Management, Bank Loans and Merchant Banking.

 

Cash Management

Your bank is your ally in effective cash flow management – defined as the best steps to get funds into your bank account as quickly as possible – and can work with you on these essentials:

• Maintain a high average daily balance. Most banks focus on the "average daily balance" in your account when analyzing a loan request. Maintain as high a balance as possible by depositing revenue immediately upon receipt and spreading the payment of bills throughout the month.

• Request a daily automatic bank sweep. Establish a minimum amount, such as $2,500, to remain in your general account. Then, instruct the bank to segregate all funds in excess of this amount at the end of each day and "sweep" or transfer those excess funds into a money market account. With a good attorney/banker relationship, the cost for this service (if any) is usually included as a negligible element of the bank’s total fees.

• Maintain separate payroll and general accounts, placing in the payroll account the full amount of gross payroll (including employee portion of taxes) on the day that payroll is due. The general account should be maintained only with those funds necessary to cover the normal flow of checks that are presented to the bank that day for collection

• Use trust accounts effectively. Work with your banker to set up an effective trust account withdrawal process. Flat fees or retainers can be withdrawn from a client’s trust account as specified in the engagement agreement. Deposit r etainer fees into a general account, or split it into a non-refundable retainer and a balance withdrawn as the work is performed. When your bank understands the method you use, you get access to the money sooner.

 

Bank Loans

Whether you’re an established firm or a fledgling one, the fundamental reason for seeking a bank loan is that cash needs exceed the firm’s own cash generation ability through client receipts and partner capital. 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 of 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 ten years for a large law firm, three to five for a smaller one. Most involve leasehold improvements and furniture and equipment purchases.

To get the loan you need and want, build a relationship of trust by educating your banker on how the business side of your firm operates. That means documenting clear plans for cash and receivables management, marketing and business growth, establishing your qualifications under the “Four Cs” test (character, capacity to repay, capital and collateral), and maintaining a high credit rating. When you seek a loan, summarize concisely the purpose; emphasize the business soundness of your practice, the safety of the loan and the security that it will be paid back. If you’ve established the right banking relationship, your odds of receiving the loan should be excellent.

 

Merchant Banking

Having a merchant account with your bank permitting payment by credit card can be a tremendous convenience for your clients. It is also an important source of revenue generation for any solo practice, because it enables the lawyer to get access to funds faster and easier. If you have the credit card information of the client and permission to charge his or her account, you get paid more readily and certainly more quickly. That gives you greater convenience and improved cash flow. The few dollars that you must pay in credit card processing fees to get paid (2 to 4 percent, depending on your volume, the card and your ability to negotiate with your bank and processing agent) are offset by the ease and assurance of payment and the speed of collection.

However, accepting credit cards does pose risks for any solo that does not understand the rules or observe good business sense. Here are some important considerations to keep in mind.

• Be sure to spell out in your original engagement letter that credit cards will be accepted in payment and have the client sign an authorization to charge their cards if they choose to pay that way.

• Use client payments by credit card only for legal services rendered. They should not be requested or accepted for unearned retainers or charge-backs of unearned fees. (Note: Some lawyers have separate trust accounts for retainers, making arrangements with the bank that all fees and charges are paid from their general account.)

• Secure the client’s agreement that no dispute with the law firm will be raised with or adjudicated by the credit card company. Any dispute over fees paid by credit card should be settled between the lawyer and the client, governed by the rules of professional conduct, including fee mediation/arbitration where appropriate.

• Do not charge clients for credit card processing fees. Clients will likely resent the charge, and your contract with your credit card company and merchant account organization may prohibit surcharges and subject you to penalties if you try to assess them.

 

Mutual Benefit

Lawyers should look for a bank that gives them the types of services and responsiveness they want. An effective bank can handle both essential financial transactions as well as a wide range of other services that make solo practices more efficient businesses. But the lawyer-banker relationship transcends services alone. When your need for help is unexpected and great – for example, an emergency loan to cover funds for rent, payroll, supplies and a new office in the event of a fire, flood or other disaster – the partnership you establish with your bank can assure the financial liquidity that will keep your firm in existence.

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