Understanding the New Landscape for Law Firm Financing
The Small Business Administration (SBA) has implemented a significant rule change that directly affects law firms carrying Merchant Cash Advance (MCA) debt. As of June 1, 2025, SBA loans – including 7(a) loans, Small loans, SBA Express loans, and Export Express loans – can no longer be used to refinance MCA debt or factoring agreements. This regulatory shift creates important considerations for law firms that have utilized MCAs as a financing solution.
Why the Change Matters
The SBA’s new policy aims to prevent its loan programs from serving as routine “bailouts” for businesses caught in cycles of unsustainable MCA financing. This move also distances the SBA from validating the high-cost MCA model as a viable long-term funding strategy for businesses, including law firms.
The Challenge of MCA Financing for Law Firms
MCAs provide upfront cash in exchange for a percentage of future receivables. Key features often include:
- Costs determined by a factor rate rather than a fixed APR.
- Short repayment terms (typically 3–18 months).
- Frequent (often daily or weekly) repayments.
- Minimal underwriting, primarily focused on revenue.
This structure means MCA financing can be substantially expensive. Effective APRs often range from 60% to 350% or even higher, far exceeding conventional loan rates. Factor rates (commonly 1.1 to 1.5) dictate the total repayment. For instance, a law firm receiving $80,000 might repay $104,000 over six months—a $24,000 fee. Such short terms and frequent, high payments can severely strain cash flow.
Unique Impacts on Law Firms
Law firms, particularly those operating on contingency fees or experiencing irregular revenue cycles, have sometimes turned to MCAs for quick capital for operational needs, marketing, or expansion, especially when traditional bank loans proved challenging to secure due to:
- Unpredictable and lengthy case timelines.
- Varying settlement amounts.
- The inherent risk of unsuccessful cases impacting profitability.
The Risks Going Forward
With the SBA refinancing option now unavailable, law firms holding MCA debt face heightened risks. These include potential default, which can trigger aggressive collection efforts like forced repayment or client payment diversions, and an increased likelihood of severe financial distress or even bankruptcy. Furthermore, the presence of MCA debt may make traditional lenders more hesitant to offer other forms of financing, viewing the firm as a higher-risk borrower and potentially leading to more loan rejections.
Alternative Financing Solutions for Law Firms
Given the restriction on SBA refinancing of MCA debt, law firms may need to explore alternative financing solutions and evaluate the risk of borrowing.
- Business Lines of Credit: Flexible capital for short-term needs or MCA consolidation, but require strong credit.
- Term Loans: Lump sums with fixed payments, often at lower rates than MCAs, but with stricter approval.
- Specialized Law Firm Loans: Tailored for legal practices, with flexible repayment tied to cash flow. Litigation finance funds cases without impacting firm finances.
- Debt Consolidation and Settlement: Combine debts for easier management and potentially lower rates, or negotiate MCA settlements with specialist help.
Strategic Recommendations for Law Firms
In light of this altered financing landscape, proactive financial management is crucial for law firms with MCA debt.
Assess and Strategize
Firms should thoroughly assess their current financial situation and the terms of any existing MCA agreements to understand their debt burden and determine the best path forward.
Prioritize Cash Flow Management
Implement robust strategies such as negotiating favorable client payment terms, diligently controlling expenses, and utilizing accurate financial forecasting. Critically, avoid “stacking” MCAs—the practice of taking new advances to pay off old ones—which rapidly leads to unsustainable debt.
Cartiga: A Better Alternative for Law Firm Financing
While traditional options may not always align with law firms’ unique operational and cash flow needs, specialized legal funding providers like Cartiga offer solutions tailored for these challenges, especially for contingency fee practices. Cartiga provides financing with flexible repayment terms often tied to case resolutions, competitive rates significantly lower than typical MCAs, and no daily or weekly withdrawal requirements, presenting a more sustainable alternative.
Conclusion
The SBA’s prohibition on using its loans to refinance MCA debt is now in effect, significantly altering financial strategies for many law firms. Firms with existing MCA obligations, or those considering future financing, must promptly evaluate their options, whether pursuing alternative financing or restructuring current debt. By understanding these regulatory impacts and proactively managing their finances, law firms can better navigate this new environment and build a more stable financial foundation.
This information does not constitute legal advice, and should not be relied upon as legal advice.
