Law firms may be wary of borrowing money, especially during times of financial strain and uncertainty – and rightfully so. However, while taking a cautious approach to financing is prudent, there are several advantages to using credit wisely to sustain your business and support growth.
Using credit is particularly helpful in leveling-out the peaks and valleys associated with the irregular cash flow of contingency fee work, as well the delayed payments associated with hourly work. In this piece, we will explore three key benefits to using credit that lawyers should consider.
- Access to capital before a lull in cash flow occurs. Cash flow is “king”, it’s the lifeline to sustaining and growing your practice. Having convenient access to capital or credit can help you get through gaps in your cash flow while providing current cash for needed business expenses. This flexibility allows you to manage the cash flow peaks and valleys, allowing you to manage daily business expenses seamlessly.
- Opportunities to invest back in your firm. With access to capital, you can focus on investing in your business –i.e. personnel, existing cases, new cases, technology, expansion and/or partner returns Each of these investments or a combination of them allow you to grow your firm while properly managing your daily expenses
- Financing case costs. Case cost financing can help level the playing field and ensure that plaintiffs’ lawyers have the financial wherewithal to obtain just compensation for their clients. This specific type of funding can allow for a more even match against large institutions like insurance companies, providing the plaintiff law firm with access to the full scope of resources needed to pursue a case to its conclusion.
Litigation is often expensive and can take years to resolve. Borrowing money to pay for case costs, such as court filing fees, expert witness fees, trial exhibits, and deposition transcripts, can alleviate financial pressure and help put your mind at ease. Also, in most jurisdictions, with proper disclosure, this approach allows you to pass along the interest to your clients*. This results in more liquidity for you to invest your hard-earned after-tax dollars back into your business. Most importantly, using credit to finance your case costs can provide you with the financial backing you need to take on well-capitalized defendants and achieve optimal results for your clients. You don’t have to be a counselor and a creditor to your clients.
As economic uncertainty looms, having “dry powder” in available credit has minimal costs and a lot of benefits, allowing you to focus on your practice instead of losing sleep over your current and future cash flow concerns. With these benefits in mind, using credit smartly should be a solution for every law firm to consider.
*As per the ethics opinion of the state you operate in.