Why Banks Decline Law Firms (Especially Contingency Practices), and What Works

By MercFinancial · Published 2026-10-21

Banks decline law firms because the collateral is thin, contingency revenue is lumpy, work in process cannot be pledged the usual way and ethics rules block equity. Specialty lenders were built for exactly that file.

Banks decline law firms, and contingency practices most of all, because the file fails the tests a bank is built to apply: there is little hard collateral, revenue arrives in lumps when cases settle rather than in steady monthly deposits, the firm's main asset is work in process that cannot be pledged the way inventory or equipment can, ethics rules keep outside equity off the balance sheet, and the revenue leaves with a key partner if the partner leaves. None of that makes a law firm a bad credit. It makes it a credit a general commercial banker is not set up to underwrite, which is a different problem with a different solution.

This guide takes the bank's objections one at a time, separates policy from the fixable, and then describes the lenders built for law firms: banks with law-firm groups, case-cost and portfolio lenders, receivables lenders and SBA lenders. It ends with how to present a contingency file so the right lender says yes.

A bank decline tells a contingency firm which lender it asked, not whether the firm is fundable.

The five reasons banks decline law firms

A commercial bank underwrites to a template: collateral it can liquidate, cash flow it can see every month, and a balance sheet that can absorb a bad year. A law firm fails the template in five places.

• No hard collateral. Leased offices, used furniture and laptops do not cover a loan. Client funds in trust belong to clients and can never be pledged. The firm's value sits in people and unfinished matters.
• Lumpy revenue. An hourly firm's collections swing with client payment habits. A contingency firm's revenue arrives in settlements, so twelve months of statements show a few large deposits and long quiet stretches that a bank's cash flow model reads as instability.
• Work in process that cannot be pledged in the usual way. A bank can take a security interest in a firm's accounts and contract rights, but a contingent fee interest in a case that may lose has no liquidation value in a bank's eyes, so it is given no borrowing-base credit.
• Ethics rules on fee sharing and ownership. Rules modeled on ABA Model Rule 5.4 bar non-lawyer ownership and fee sharing, so a firm cannot raise equity to strengthen the balance sheet, and a bank cannot take warrants or a profit share to improve its position.
• Key-person risk. Clients and cases follow lawyers. A lender has to price the chance that the partner who originates most of the revenue leaves, is disabled or dies before the loan is repaid.

Why contingency practices fail bank underwriting most often

A personal injury, mass tort or employment plaintiff firm runs on a cash flow mismatch that a bank's model cannot forgive. The firm pays salaries, rent and case costs for months or years before a matter resolves, and Rule 1.8(e) lets it advance court costs and litigation expenses with repayment contingent on the outcome, so the costs sit on the books as receivables from clients who may never owe them. A mass tort docket can absorb seven figures of expert fees before the first bellwether trial.

Then the money arrives, often in a single wire that distorts the month it lands in and the year it lands in. The bank sees a firm that was unprofitable for three quarters and wildly profitable for one, and it also sees that its usual tool, a line of credit with an annual cleanup period, does not fit a firm that may need to be fully drawn for eighteen months straight. Add the trust account, which inflates deposits without adding a dollar of firm revenue, and the statements take explaining that a general banker has no training to do.

The firm's real financial statement is its docket: how many cases, at what stage, with what expected fees and what expected dates, and how accurately the firm has forecast those in the past. Nothing in a standard bank application asks for it.

Which objections are policy and which a law firm can fix

Not every reason on the decline letter means the same thing. Some are the bank's credit policy and will not change for any file. Others are presentation problems the firm can fix before the next application.

A firm that has fixed the fixable and still hears no is hearing policy, and the answer to policy is a different lender, not a better cover letter. The general playbook for that moment is in what to do after a bank declines a business loan.

The lenders built for law firms

A separate set of funding sources underwrites the things a general bank ignores. Which of them will look at a given firm depends on each source's credit policy, and all of them cost more than a bank line because they are taking risk a bank will not.

• Banks with a law-firm practice group. A small number of banks staff teams that read dockets and collected-fee histories. They write lines of credit and term loans to established firms, including contingency firms with a track record, and they expect detailed reporting in return.
• Case-cost and portfolio lenders. Litigation finance companies lend to the firm, not the client, against case costs or against the expected fees of the whole docket. The structures, their cost and the ethics boundaries are detailed in contingency fee and case-cost funding.
• Post-settlement funders. They advance against earned fees in settled matters that are waiting on payment, usually in days.
• Receivables lenders. For hourly and flat-fee firms, asset-based lenders advance against billed invoices without the bank's collateral expectations.
• SBA lenders. Law firms are not excluded by 13 CFR 120.110. A 7(a) loan through an experienced SBA lender fits a buildout, a practice purchase or a partner buyout better than it fits case costs.
• Unsecured and revenue-based products. For smaller amounts, lenders price on the owners' credit and the firm's deposits rather than its collateral. The trade-off is cost and a short term, so the use should be short as well. See unsecured business loans.

How to present a contingency law firm so the right lender says yes

The lenders above say yes to firms that can prove their docket. Build the file around that proof.

1. A case inventory report from the practice management system: every open matter, its stage, costs advanced, expected gross fee, expected resolution date and the basis for both estimates.
2. A resolution history covering at least three years: cases resolved, fees realized against what was forecast, and average time from intake to fee. This is the firm's credit score in a lender's eyes.
3. Collected fees by month for thirty-six months, separate from billings and separate from trust activity, with the big settlements labeled.
4. A cost-advance schedule showing what has been advanced, on which matters, and the firm's policy for writing costs off on losses.
5. Clean trust accounting: reconciliations, a separate operating account, and no history of bar complaints about client funds.
6. A people plan: who originates, who tries cases, what happens if either is gone, and whether key-person coverage is in place.

With that file, the conversation changes from whether a firm can be funded to which structure fits. The full menu is in law firm financing options, and a revolving structure specifically is covered in law firm lines of credit.

Where MercFinancial fits

MercFinancial is a commercial funding brokerage in Houston, not a lender, and a bank decline is where most of its law firm conversations start. A funding specialist reads the decline letter, the collections history and the docket together, then identifies which of more than 160 wholesale and institutional funding sources have a credit policy that allows law firms and the structure the firm needs. One file goes to all of them, the offers are compared on cost, term, reporting and recourse, and the firm is told plainly if nothing fits. Approval, amount, rate and term are always the funding source's decision. The rest of the law firm funding guides cover each structure in depth.

Frequently Asked Questions

Why can't law firms get bank loans?

Most banks decline law firms because the firm has little collateral a bank can liquidate, its revenue is irregular, its main asset is unfinished work the bank gives no credit for, and ethics rules keep it from adding equity. Established hourly firms with steady collections do get bank lines. Contingency firms usually need a lender that underwrites the docket instead of the monthly deposits.

Can a contingency fee law firm get a line of credit?

Yes, from the right lender. Banks with a law-firm practice group and specialty legal lenders write lines to contingency firms, sized on the case inventory, the firm's history of resolving cases on forecast, and collected fees. Expect detailed reporting, a personal guaranty from the partners, and a higher cost than a conventional bank line. Availability depends on the funding source.

Is a law firm's work in process collateral?

It can be, but only to lenders that know how to value it. A bank gives unbilled time and contingent fee interests little or no borrowing-base credit because they have no liquidation value. Case-cost and portfolio lenders take a security interest in the firm's fee entitlements across the docket and advance against the expected fees, which is what makes their structures possible.

Does a bank decline mean my law firm has bad credit?

Usually not. Most law firm declines are about the bank's credit policy, which has no category for contingency revenue or docket collateral, rather than about the partners' credit or the firm's prospects. Read the decline letter for the stated reason. If it names revenue irregularity or collateral, the answer is a different kind of lender, not a repaired application.

What should a law firm do after a bank declines it?

Fix what is fixable first: report collected fees rather than billings, clean up trust reconciliations, and write down who originates revenue and what happens if they leave. Then build a case inventory report and a resolution history. With those, approach lenders that underwrite law firms, or have a broker place the file with several of them at once and compare the offers.

MercFinancial 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.