Law Firm Lines of Credit: Case Costs, Payroll and Growth
By MercFinancial · Published 2026-10-21
A law firm line of credit is sized from trailing collected fees, eligible receivables and, for contingency firms, case inventory. What it should and should not fund, the covenants, and how bank and specialty lines differ.
A law firm line of credit is sized from three things: trailing collected fees, eligible billed receivables and, for contingency practices, the case inventory, and it exists to bridge the gap between the work a firm does and the day it is paid. Banks write lines to firms with steady collections. Banks with law-firm groups and specialty lenders write them to contingency firms as well, usually against a borrowing base built from the docket. The line should fund case costs, payroll in slow collection months and the ramp of a new hire or office. It should not fund partner draws, a losing case or a permanent deficit.
This guide covers how lenders size a law firm line, what it should and should not pay for, the covenants and reporting that come with it, the personal guaranty, and the difference between a bank revolver and a specialty lender's facility. It ends with an illustrative sizing and how MercFinancial places the request.
- A law firm line of credit is sized from trailing collected fees, eligible billed receivables and, for contingency firms, a case inventory the lender can verify.
- A law firm line should fund case costs, payroll gaps and growth that returns cash, never partner draws or a permanent operating deficit.
- Nearly every law firm line carries a personal guaranty from the owning partners, periodic reporting, and for bank lines an annual cleanup or rest period.
- Whether a bank or a specialty lender writes a law firm line depends on the firm's billing model and the funding source's credit policy.
A line of credit should carry a law firm from work done to fees collected, not from one year's deficit to the next.
How a law firm line of credit is sized
Lenders size a law firm line from whichever of three bases the firm's billing model produces. The first is a cash flow basis: a bank looks at trailing twelve-month collected fees, the firm's margin after partner compensation, and existing debt, and sets a limit the firm's cash flow could carry if it were fully drawn. This is the usual approach for an established hourly firm with a long relationship.
The second is a receivables basis. An asset-based lender, or a bank using a borrowing base, advances a percentage of eligible billed receivables, commonly those under ninety days old and not owed by a disputed or related client, and sometimes a smaller percentage of unbilled work in process. The advance rate on billed legal receivables is often lower than on commercial trade receivables because clients dispute legal bills more often. The limit moves every month with the aging report.
The third is a docket basis, used by banks with law-firm groups and by specialty legal lenders for contingency practices. The firm's case inventory is listed matter by matter with expected fees and dates. The lender discounts each expected fee by stage, by case type and by the firm's own history of resolving cases on forecast, then advances a portion of the discounted total. A firm that has forecast accurately for years gets a smaller discount than one that cannot show its history. The broader menu around the line is in law firm financing options.
What a law firm line should fund, and what it should not
A line is short-term money that revolves, so it belongs against short-term needs that turn back into cash. For a law firm that means:
- Case costs on matters with a defined path to a fee: experts, depositions, records, filing fees and trial expenses.
- Payroll and rent in the months between collections, in a practice whose annual numbers support the payroll.
- The first months of a lateral partner's book, a new associate's caseload or a second office, where the fees are identifiable.
- Technology and systems that lower cost per matter, when a term loan or equipment financing is not available.
It should not fund partner distributions, a single speculative case that is larger than the firm's capacity to absorb a loss, a buyout (that is term debt), or a deficit that recurs every year. Lenders know the pattern: a line that is drawn to the limit all year, with draws in the partners' names, is a loan funding a lifestyle, and it is usually called at renewal. The difference between a line and a term loan, and when each fits, is covered in business line of credit vs term loan.
Using the line to make partner distributions in a slow quarter is the most common reason a law firm line is not renewed. Lenders read it in the statements, and most bank facilities cap distributions by covenant.
Covenants, reporting and the personal guaranty on a law firm line
Expect the facility to carry conditions, and expect the specialty lender's conditions to be heavier than the bank's in reporting and lighter in financial ratios.
- Borrowing base certificate. Monthly or quarterly for receivables and docket lines, with the aging report or updated case inventory attached.
- Financial covenants. Minimum partner capital or liquidity, a cap on distributions, sometimes a debt service coverage test on the firm's cash flow after partner compensation.
- Cleanup period. Bank lines commonly require the balance to rest at zero for a stretch each year, often around thirty days, to prove the line is not permanent capital. Docket-based lenders usually replace this with re-margining as cases resolve.
- Negative pledge and cross-default. No other liens on receivables or fee entitlements without consent, and a default on any other firm debt is a default here.
- Key-person insurance. Some lenders require life or disability coverage on the originating partners, assigned to the lender.
- Personal guaranty. Joint and several among the equity partners is the usual request. Larger firms sometimes negotiate several guaranties limited to each partner's share.
Trust account irregularities and bar complaints about client funds are reporting events under most facilities and, in practice, grounds to call the line.
Bank revolver versus specialty lender line for a law firm
The two facilities solve different problems. The bank revolver is cheaper and narrower. The specialty line is costlier and built for the file a bank declines, which is why many contingency firms hold one and not the other. Why banks pass on that file is explained in why banks decline law firms.
| Feature | Bank revolver | Specialty lender line |
|---|---|---|
| Who qualifies | Established firms with steady collections, often an existing deposit relationship | Contingency and mixed firms with a verifiable docket |
| Basis | Cash flow or billed receivables | Case inventory, costs advanced, resolution history |
| Cost | Lowest available to a firm | Higher, priced to docket risk |
| Cleanup | Usually required annually | Usually replaced by docket re-margining |
| Reporting | Financials, aging | Matter-level inventory updates |
| Time to close | Commonly four to eight weeks | Commonly two to five weeks |
| Recourse | Firm plus partners' guaranty | Firm plus partners' guaranty, with some non-recourse docket structures |
An illustrative line, sized two ways
Illustrative example, round numbers only. Two firms each collect $3,000,000 a year. The first is a business litigation firm billing hourly, with $600,000 of billed receivables under ninety days from unrelated clients. A bank or asset-based lender advancing three-quarters of that eligible pool would set a borrowing base near $450,000, and the limit would move with each month's aging. The second is a personal injury firm with no billed receivables and a docket of forty open matters whose expected fees total $4,000,000. A specialty lender discounting those fees by stage and by the firm's history might count $1,600,000 as supportable and advance a portion of it, which could put a facility near $600,000, with a sublimit for case costs. Both firms have the same revenue. Only one has a file a bank will read, and the other has a file a specialty lender will. Neither figure is a term from MercFinancial or any funding source, and real sizing depends on the lender's advance rates and the file.
Where MercFinancial fits
MercFinancial is a commercial funding brokerage in Houston, not a lender. For a line of credit request, a funding specialist first works out which basis the firm's file supports, cash flow, receivables or docket, because that decides which of more than 160 wholesale and institutional funding sources will consider it. One file goes to the sources whose credit policy allows law firms and that structure, the offers are compared on limit, cost, cleanup, reporting and guaranty, and the firm is told plainly if none fits. Approval, limit, rate and covenants are the funding source's decisions. The law firm funding guides cover the other structures, and the business funding programs page lists what is placed.
Frequently Asked Questions
How is a law firm line of credit sized?
From one of three bases. A bank sizes a cash flow line from trailing collected fees and the firm's margin after partner pay. An asset-based lender advances a percentage of eligible billed receivables, usually those under ninety days. A specialty lender sizes a contingency firm's line from its case inventory, discounting expected fees by stage and by the firm's record of resolving cases on forecast.
Can a law firm use a line of credit to pay partners?
It can, but it should not, and most facilities cap distributions by covenant. A line is meant to bridge the gap between work and collections, and a lender who sees draws funding partner distributions in slow quarters treats the line as permanent capital and usually declines to renew it. Keep distributions tied to collected fees and use the line for costs and payroll timing.
Does a law firm line of credit require a personal guaranty?
Almost always. Banks and specialty lenders ask the equity partners for a joint and several personal guaranty, and larger firms sometimes negotiate guaranties limited to each partner's ownership share. A few docket-secured structures from litigation finance companies are non-recourse to the partners and look only to the fees, at a higher cost. Expect the request and settle the allocation among partners before applying.
What is a cleanup period on a bank line of credit?
A cleanup period is a stretch each year, commonly around thirty days, during which the line must rest at a zero balance. It proves to the bank that the line funds short-term timing gaps rather than permanent capital. Contingency firms often cannot meet it, which is one reason they end up with specialty lenders, whose docket-based facilities re-margin as cases resolve instead.
How big a line can a new law firm get?
A firm under two or three years old usually cannot get a bank line sized from history it does not have. The realistic options are a small unsecured line priced on the owners' personal credit, equipment financing for the buildout, or for a contingency firm a case-cost facility sized from the docket it already carries. The amount depends on the funding source and the file.
Find out how a lender would size a line for your firm before you apply. A funding specialist reads your collections, receivables and docket the way an underwriter does and tells you which funding sources will write the line. Stephanie, our AI lending assistant, pre-qualifies in 2-3 minutes with a soft credit pull that won't affect your score, or book a free 30-minute call with a funding specialist at (830) 587-5022.
Get Pre-Qualified with Stephanie Book a Free 30-Minute CallMercFinancial is a commercial funding brokerage in Houston, Texas. MercFinancial is a broker, not a lender: every loan is made by a third-party funding source, every request is subject to that source's underwriting and credit approval, and loan amounts, advance rates, interest rates, terms, fees, collateral and guaranty requirements vary by funding source and borrower and are not guaranteed. Nothing here is a commitment to lend or an offer of credit, and financing is for business purposes only. Any example in this guide is hypothetical and illustrative; actual terms and outcomes vary. Rules of professional conduct in every state restrict fee sharing with non-lawyers and non-lawyer ownership of law firms, and litigation funding is regulated or disclosed differently by jurisdiction; nothing here is legal advice and financing availability depends on the funding source's policies. This guide is educational only and is not legal, tax, accounting or investment advice.