Practicing law, while simultaneously running a successful law firm is not easy – in fact, it can be quite stressful, particularly in today’s current environment. As COVID-19 forces businesses to conserve capital, funding litigation expenses can seem especially difficult at this time. This is particularly true for lawyers who have contingency fee practices and need capital to fund case work and operations.
Lawyers traditionally struggle with balancing their client work and the pressure of building a financially sound law firm. It is increasingly important for lawyers to understand how the right financing techniques can help alleviate some of their pain points. Many lawyers depend on self-financing or turn to traditional banks to pay for case expenses, however, both options come with risks and often do not address the most salient challenges they experience.
So, what are the key pain points? Let’s explore them a bit further.
- Uncertainty. Contingent fee lawyers often take on cases that are expensive and time-consuming, with a variable timeline around when a case may be brought to trial or when a settlement/verdict will be reached. During this time of uncertainty, lawyers’ foot the bill for case-related expenses and must wait years to get compensated. With the added disruption of a pandemic, lawyers do not feel a great sense of stability and security when it comes to litigating current cases, taking on new clients and weathering further potential turbulence.
- Self-financing and cash flow management. While all lawyers know they need money to run their business, many do not understand their cash flows and often underestimate how important financial projections are to sustaining a successful business and surviving in the long run. Most contingency fee lawyers fund their case costs from their firm’s cash flow. This is not an ideal financial strategy since it ties-up the firm’s capital in litigation costs that could be invested in the firm’s current resources (i.e.-new cases, new hires, IT development). In addition, self-financing case costs essentially results in non-deductible, interest free loans to clients made with the firm’s after-tax dollars, straining cash flow even further. Lawyers should create financial forecasts from their current case inventory to properly manage their cash flow. They should consider case cost financing to support their current and future case costs, optimizing their cash flow and case settlement values. Most law firms recoup the interest paid on case costs financing from the ultimate settlement value of the case, effectively making the loan an “interest free loan” over the life of the case.
- Lack of knowledge of alternate financing options and resources. Many lawyers may think that self-financing or traditional bank loans are the only two options to fund their firm’s growth – but this is not true. Law firm owners should seek out financial business partners with highly specialized industry knowledge who have the expertise and ability to assess the value of their case inventory and case costs. Most traditional banks do not have specific expertise within the legal industry and are unwilling to lend against a contingency fee practice.; if they do extend credit, they often require pledges of the personal assets of partners as collateral. It is important for contingent fee lawyers to explore alternate financing alternatives that can bring new capital to the firm and chart a course for long-term success.
To overcome these pain points, it is crucial that contingent fee lawyers seek legal financing from reputable, experienced lending partners with whom they can develop a long-term business relationship.