You know that your law firm needs financing. The problem is that you don’t know which type is most suitable for your practice.
One simple way to uncover the best financing solution for your firm is by looking at your business model. If you know how your firm operates, then it will be easier for you to ascertain which financial product will provide the most value to your practice.
Here are some recommendations for financing based upon the three most common plaintiffs’ firm business models:
- The High Volume Firm
If you have a large number of cases in a general personal injury practice, then you likely fall into the traditional high volume firm business model.
With this type of model, most of your clients’ awards and settlements resulting from their personal injury claims, such as a car accident or slip and fall injury, average less than $100,000. As a result, if you have a traditional high volume firm you generally need to sustain a high volume of cases to maintain a consistent revenue stream. However, that is not always possible.
In periods when you have lower revenues, you have to balance staying current on operating expenses and having sufficient funds to generate new cases, which may require some form of financing.
For this type of business model, a revolving line of credit from a bank or specialty lender is typically the most useful financing tool.
A revolving line of credit provides you a flexible financial safety net—giving you access to capital at any time you need it, but at the same time, you are only charged interest on the amount you actually borrow. This means that in periods of high revenues you don’t have to accrue interest and in periods of low revenues you can cover your day-to-day expenses and still have the funds necessary to grow your practice.
- Low Volume, High Value
If your firm specializes in a smaller number of catastrophic injury product liability or medical malpractice suits, you likely have a low volume, high value business model.
Firms who fit into this model tend to have a significant need for funding to cover expenses related to litigation costs. This is because you are dealing with more involved damage calculations, which in turn means you have a greater need for proving and establishing the value of your client’s case. Your cases likely also take longer and cost more to resolve due to the more complex nature of the claims.
Taking on high-cost cases such as these often translates into larger settlements and verdicts, however it also means that you endure longer periods of uneven cash flow than someone with a traditional high volume firm.
Because the revenues generated from your cases are often higher, with this type of business model you can take advantage of case expense financing and/or post-settlement financing. Case expense financing is a form of financing where a lender provides access to funds to be used for litigation costs. Many lenders also have software that a law firm can utilize to help track those costs, as well as any interest incurred from borrowing in the event your retainer agreement permits you to pass-through some portion of the interest to your clients. Post-settlement financing provides a short-term capital solution for law firms looking for funding on cases that have settled but the fees are not yet available due to various administrative issues such as lien resolution. Recourse (requiring a personal guaranty) and non-recourse (no personal guaranty) options are available on post-settlement financing. The rates are often significantly higher if you choose to pursue a non-recourse advance, given that a personal guaranty is not required. If your financing needs are longer-term, then you probably should take advantage of the consistent capital availability a revolving line of credit delivers.
- Mass Tort
Becoming a mass tort firm is a big undertaking. This business model is not a one-size fits all structure—it varies greatly depending on how involved you are with your cases. Do you acquire cases and refer them to other counsel? Do you manage the process of case development through settlement? Here, a lender who has a keen understanding of mass torts and how your business operates is critical.
Obtaining clients who have suffered injuries that qualify them to bring a claim in a mass tort litigation can cost thousands (or more) a month in advertising.
Once you start receiving client calls, you incur certain operational expenses. The expenses are limited if you send your cases to another firm to process and litigate, but can be expensive if you provide in-house evaluations. For those that handle the processing of claims in-house, administrative costs such as providing proof of usage and obtaining medical records can pose significant obstacles. The expense is high and timing is often uncertain. Additionally, as you obtain information you may have a better opportunity to determine the viability of your case. Although expensive, assessing the viability of your client’s claim is critical in a mass tort practice.
If you have a firm that litigates mass tort claims, costs can be immense and your adversary generally has unlimited resources.
Whether you have little involvement in the case from the outset or litigate the case to adjudication—expenses are significant for a firm with a mass tort practice. Further, in many instances it can take years before your law firm receives revenues, causing additional strain on your cash flow.
Due to the unique, specialized nature of this business model, it’s imperative you choose a lender who understands mass tort litigation. Specifically, you should make sure they will consider your contingent legal fees as collateral for the financing, and if so, that they are able to adequately value those fees as an asset? A knowledgeable lender will be able to provide you the proper financing for each mass tort your firm handles.
Consequently, with a mass tort business model, a line of credit from a specialty lender is recommended. Specialty lenders will generally provide your firm with greater access to capital than a traditional lender—often as much as three to five times as much or more. Additionally, terms are more flexible and designed to meet the specific needs of a mass tort practice. This means your firm will have access to funds throughout the life of the litigation without traditional bank restrictions.
The amount you can receive from a specialty lender will range depending on your mass tort business model and underlying portfolio of cases. It’s important to recognize the differences and limitations of various lenders and how that impacts your firm.
Although most attorneys view their firm as an extension of themselves, the fact is you are running a business. No matter which type of financing you choose for your firm, the key is finding a lender who can provide the capital and expertise to best meet your needs, enabling you to obtain the best result for your client and your firm.