Bank vs. Specialty Finance

James Verrico, Esq. | Deputy General Counsel

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You have a business plan in place and your law firm is poised for growth. The case files already on the shelf require not only an investment of time but of dollars. You need to find both time and money to bring more cases through the door. Yet, like many plaintiffs’ firms, your monthly cash flow is uncertain and subject to significant fluctuations.As a result, you are constantly reinvesting those fees you worked so hard to obtain right back into the firm. Wouldn’t it be great if you could keep more of your fees and use outside financing as the fuel to keep the wheels turning?

What are your options? While the current marketplace offers several possibilities to help you run your practice, each have unique characteristics that will impact whether they are the right fit for you and your firm.

Banks:

Traditionally, lawyers first look to banks for financing. For some, this may be a good option as banks typically offer financing at low rates. As collateral to secure a loan, banks consider the borrower’s and each guarantor's tangible assets such as cash-on-hand, real estate, equipment, accounts receivable and the accumulated assets of the individual equity partners. The amount of financing is thus directly limited by the value of these assets and therefore, many attorneys find that they qualify for a smaller amount than they need. One item that banks rarely consider as collateral, however, is the value of the firm’s contingent fees, often a firm’s most valuable asset.

Because they want to be assured that the loan will be repaid each month, banks look for consistency in a firm’s cash flow. This is often in direct contrast to the typical up-and-down cycles of a plaintiffs’ firm. In addition, banks often include are “cleanup” or pay-down provisions requiring that the borrower pay the balance down to zero at least once during the term of the loan. This can put the firm in a difficult position if cases fail to settle or if fees are delayed.

Specialty Financing:

Because bank financing is not always the right fit for a plaintiffs’ firm, many lawyers look to specialty lenders for another option. There are typically two types of specialty financing in this regard: recourse and non-recourse financing.

Recourse

Like a bank loan, recourse funding typically requires a personal guarantee of payment and performance by the principal members of the firm and is secured by the borrower’s and each guarantor's tangible assets, as well as its non-tangible assets such as the value of the firm’s contingent fees. This results in the borrower’s ability to access a larger amount of financing than he or she would through a traditional bank. Because the lender is extending a greater amount of money and is considering unearned fees as collateral, the interest rates are typically higher than traditional bank rates.

The borrower and guarantors remain responsible to repay the full balance of the loan and all interest and principal payments on a scheduled basis. However, the borrower has the flexibility to draw as much or as little from the line as needed. In addition, the lender may work with the borrower to tailor the repayment terms to the firm’s anticipated cash flow or adjust repayment obligations should unforeseen delays occur in case resolutions. Finally, the borrower is not subject to potentially crippling pay-down provisions. 

A recourse line of credit provides flexibility, as it may be used for a variety ordinary business purposes including operating costs (rent, payroll, equipment leasing, utilities, etc.) marketing/advertising and case expenses. In short, the attorney can allocate funds to the areas of current or greatest need, and redirect such funds as needs change.

Non-Recourse

Non-recourse financing may be appropriate when an attorney wants to limit his or her personal liability or seeks post-settlement financing, financing while an appeal is pending, or in limited circumstances, financing pre-settlement to pay litigation expenses, on a specific case or cases.

Non-recourse funding requires repayment only after a recovery from the specific case(s) pledged to support the financing. If the case or cases are lost or there is no recovery, you have no obligation to repay the lender. Thus, non-recourse funding may be attractive in those limited circumstances where you need short-term capital, but recovery is uncertain. 

Further, non-recourse funders generally don't require personal guarantees of payment and performance--meaning you aren't personally responsible for repayment of the amount advanced. As a result, you can minimize your risk, however the amount of the funding is restricted to the funder's valuation of the case(s) pledged as collateral.

While non-recourse funding reduces your personal risk, by offloading a significant level of risk to the lender, it is no surprise that this type of financing usually involves the highest interest rates—many times it’s the most expensive type of financing out there. This could impact the overall profitability of the cases pledged, particularly if recovery is delayed due to procedural issues, appeals, lien resolution and the like.

Whichever avenue you choose for your firm, financing can help ease uneven cash flow and help manage overhead expenses to keep things running smoothly. It also enables you to grow both your personal and firm net worth simultaneously. 


The following article is part of a collaborative educational blog series, Finance Corner: A Guide for Plaintiffs' Attorneys and their Clients. If you are interested in receiving similar articles, you can subscribe here.

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Counsel Financial provides working capital credit lines exclusively for the plaintiffs' bar in all states except California, where credit lines are issued by California Attorney Lending