A Line or a Loan?
Those solos who have earned their stripes have a word of advice to newcomers on financing: Get a line of credit from the bank before you actually need it.
Unless your practice receives regular retainers or has other steady income, its cash flow will be sporadic, especially in the early years. A line of credit, generally applied toward working capital, could mean the difference between making payroll or closing up shop.
“The last thing you want to do is look for credit when times are bad,” says Eric Turkewitz, a personal injury and medical-malpractice attorney in New York City. “The time to get a line of credit is when you’re having good years.”
Turkewitz says he learned the hard way how critical such a financial cushion can be. Several years ago he found himself in a cash flow rut; when he recovered, Turkewitz subsequently opened a line of credit with Citibank and has applied for an increase to the line every year.
Unlike business loans, which carry a fixed repayment schedule, lines of credit typically require no collateral and are used only when needed, making them a flexible choice for solos who qualify. The bank will look at overall creditworthiness, reviewing criteria such as tax returns, credit scores and other financial indicators.
Bankers liken this financial vehicle to an insurance policy or home equity loan—there when needed but requiring discipline. It can be paid down and used again.
“It’s an unsecured financing solution to supplement cash,” says a spokeswoman for lender Wells Fargo. “The rate is better than a business loan.”
Wells Fargo offers terms fairly typical of large commercial banks. Candidates must demonstrate earnings power by operating steadily for two years before they can apply for a line ranging from $10,000 to $100,000.
Rates are calculated using prime rate plus a margin, which varies depending on the applicant’s credit ratings. These days, lines of credit usually carry rates of around 8 percent to 11 percent. Credit card debt, by comparison, runs about 2 percentage points higher. The bank offers a credit card along with its line and has a rapid approval process.
For newly minted solos such as Dan X. Nguyen of Fountain Valley, Calif., the nominal fee required to keep his line open is a small price to pay for peace of mind. Nguyen, who has been running a solo practice focusing on business transactions for more than a year, has already drawn on his $30,000 credit line to help with costs.
“You can always have that extra cushion of money available to you if you don’t have a cash surplus,” he says. “I think it’s a good idea when business slows down and you need to take care of expenses.”