If you’re contemplating financing for your law practice with a bank or third-party litigation funder, you should consider whether, and to what extent, they truly understand your legal practice.
Often, financiers simply rely on the 5 C’s of credit when evaluating a law firm—credit history, capacity to repay, collateral, capital (the amount invested in the firm), and conditions (market or industry factors that could effect repayment).
But there’s a 6th C for plaintiffs’ practices—contingent fees.
The nuances and intricacies of a contingent fee practice are often overlooked, which can lead to a disconnect between your expectations and reality.
Here are 4 quick reasons why you should choose a funder who understands the nature of your plaintiffs’ practice.
- More Significant Financing
Law firm finance companies assess the value of your current and future case revenues as collateral for the funding (which thereby allows for a much higher amount of borrowing) as opposed to limiting the value of the collateral to your personal net worth, current liquidity of the firm, real property assets and retirement accounts (i.e. hard assets).
If the funder limits your collateral to your hard assets, then the amount of financing you’ll be eligible to receive will be limited too.
- A Better Relationship
Even if you choose a funder who values your contingent fees as collateral, keep in mind that not all law firm financing companies are the same.
Look at who will be reviewing and assessing the value of your cases. Funders that have attorneys on staff are best equipped to evaluate your practice, your attorneys and your clients, plus respect your professional and ethical obligations.
Although a funder’s attorneys are generally part of larger underwriting team comprised of accountants and other non-lawyer advisors, unlike funders who don’t employ attorneys, you’ll get the benefit of having someone internally who can best determine what your firm needs.
- A Unique Perspective
Look for funders who have in-house attorneys with significant plaintiff and defense experience.
Often, as litigators, we see our cases as being extremely valuable because we wouldn’t have signed them up otherwise. This positive perceptive, however, can lead to over-valuing and, in the worst case scenario, taking on more financing than you can repay.
A funder’s counsel should ask you questions that’ll stimulate discussion and your own evaluation of cases. Of course, your funder should never interfere with your independence or professional judgment, but getting a differing viewpoint can be useful and lead to an unbiased evaluation of your practice.
This is where choosing a financing company with attorneys who can objectively value your case fees can be beneficial. Significant legal experience, plus years of expertise from having valued hundreds, if not thousands, of cases throughout the nation, can mean the difference between financing that will enhance your firm versus financing that’ll hinder it. Finally, they will best understand the complexities and challenges of contingent fee practice, such as delayed trials, discovery upsets, client and witness problems and unexpected results of motion practice.
- Added Value
Lenders with experienced attorneys on staff can also strengthen your firm.
First, by challenging you in ways that you wouldn’t expect from others on your team. The process of the legal review should be an opportunity to have frank discussions on the merits and procedural process of your cases. Of course, you know your portfolio better than anyone, but an analysis from another experienced attorney can help to see things you may have missed or placed lesser importance on.
Second, they have a nationwide network of attorney contacts in your industry. If you need a co-counsel, they should be able to connect you with well-known and well-respected firms in your respective area of litigation. This type of added value may not be typical of all lenders, especially those not truly familiar with the practice of law.
Third, as an attorney, I know that many of us aren’t that familiar with managing a business. Your “practice” is a “business.” You need to know what will make your practice more profitable and gain exposure to clients. Are your expenses high relative to revenue? What are the causes of needing co-counsel? Are marketing and advertising efforts paying off?
Having a funder with a strong legal team adds value to your firm without added costs. They can become a reliable source to help you navigate the ebbs and flows of a contingency practice. While only you control your cases, having a lender you can turn to for advice or guidance and financing will benefit your firm in more ways than one.
