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Like any other business, a successful law practice requires cash to operate. Sometimes, however, cash is in short supply. The firm may not have collected on its accounts receivable as quickly as anticipated, or it may be experiencing growth and needs cash to finance the hiring of new people, facilities or equipment.

In each of these situations, the common denominator is that the cash needs exceed the firm's own cash generation ability. That's where bank loans come in.

Banks make loans based on The Four Cs: character, capacity, capital, and collateral. Most weigh these factors as follows: character (80 percent), collateral (15 percent), and capacity and capital together (5 percent).

Character: The first question a bank asks is whether the ethics, business practices, and general reputation of the prospective customer/borrower is such that the bank is comfortable. Does the bank want to do business with this lawyer? Without a yes on this question, there is no further discussion. The elements of character are: honesty, integrity, and ability.

Capacity: The next question is whether the cash flow of the law firm is such as to justify the confidence that the loan carrying costs (interest and related charges) and the principal amount of the loan will be paid back at the appointed time. A cash flow statement (not just an income or revenue and expenses statement) must be submitted to the bank for its consideration.

Capital: The bank wants to know what the funds are being used for. If the loan proceeds will be used to purchase an asset, the bank wants to know how much of the cost will be purchased by the law firm with assets of the firm. In other words, how much equity (or debt-to-equity ratio) will the law firm have in the asset. Banks do not want to be the only party investing in the given asset; the bank wants to know that the law firm has a substantial stake in the purchase.

Collateral: Despite the bank having been as careful as it can be in its examination and review of the borrower (due diligence), there still may come a time when the loan will go into default. If all else fails, how will the bank get paid? The "back door," as some bankers call it, is the value and adequacy of the collateral that was given to the bank to secure the payment of the debt in accordance with the terms of the loan. What type of collateral will be given to secure payment? Is it a house, another piece of real estate, equipment used in the operation of the law firm, or a personal guarantee?

For law firms organized as partnerships, there is joint and several liability for the bank loan (assuming that each partner has signed the note). Therefore, the partner with the greater asset base may want to insist that there be substantial collateral or, alternatively, he or she may want to request that the potential profit should be greater than for the other partner(s) by virtue of the greater risk (exposure to risk).

If the loan is unsecured, the bank has given up the fourth C. In today's economic environment; this would be very unusual and occur only with the best of the bank's customers.

Lawyers should think of the bank as a supplier. Suppliers provide lawyers with the goods and services that allow the firm to deliver quality legal services. One of these suppliers, for most lawyers, should be the bank. Good banking relationships provide the necessary funds and services to allow a law firm to maintain itself and grow.