Why don’t more small legal tech companies use bank loans to fund their companies? Most are chasing angel and venture capital when funding may be down the street.
I was over to LexBlog’s bank this afternoon for what feels like an annual checkup. I am happy to report, all good, the bank was impressed with the bottom line from last year. I asked that they come over and tell Mrs. RL.
We do a line of credit with our bank that was turned into a term loan a few years ago that’s renewed annually. We pay interest monthly and make regular principal payments throughout the year to reduce the balance.
I have always liked banks. Straight talking and down to earth people who are in business to make loans to business people. Today, the home loans are gone to the large aggregators of home loan lenders it seems.
Small banks matter. I sat down with the CEO, in addition to our loan officer, today. Our bank is a $100 million bank, not a $900 billion one, like Wells Fargo.
Why small bank loans for legal tech companies?
- Keeps you focused on business (producing and selling), not raising capital.
- Keeps you lean and mean. You’ll not spend money on things you don’t need – you won’t have the money.
- Keeps you focused on developing cash flow. Banks need to see you can cash flow payments on a loan. They cannot lend on collateral or a guaranty alone. Until you get cash flow, or least a forecast of cash flow based on a history of revenue, ie growing subscription revenue, scrape buy. Don’t quit your job. Or as one lawyer I know did, work in large law for a number of years and save what you can. He has accumulated enough savings to survive for two to three years in his new venture.
- You learn to build a small business. Venture capital companies may call it a “lifestyle company,” but a small company doing millions a year and feeding twenty to thirty families is something to be proud of. It’s the stuff that this country is made of.
- You have a ready source of capital for hiring or small acquisitions.
- It’s cheap. You’ll pay as little as three to four percent interest.
- You build a real relationship with real people in the banking industry. You are going to want those relationships over your business lifetime.
- Many lawyers have a history of working with small banks for working capital or the funding of cases. Borrowing from banks is in your comfort zone.
You’ll need to collateralize the loan. For most people, that’s a second mortgage on the house or condo. That can eliminate folks without real estate. You may need turn to a guarantor.
The amount you are borrowing needn’t be a large sum, it probably should not be. It could be $50,000 to $200,000. In today’s world, with open source solutions, cheap hosting, people working on contract and the like, such sums can go a long way.
I get to a fair number of legal tech conferences. Good people with decent ideas sound like they are in the HBO show, Silicon Valley, rather than in real life when it comes to funding companies. Rather than talking like you are in the funny papers of tech startups, why not just build a business with funding down the street?