Once you’ve decided it’s time to get financing for your firm, there are many things that you need to take into consideration, including the type of lender (e.g. a specialty finance company versus a bank), interest rate, repayment provisions and the maturity date.
What’s often overlooked, but is extremely important to your decision, are the post-closing obligations your firm has to your lender.
It’s well known that traditional post-closing requirements can include regular financial reporting—providing copies of annual tax returns, malpractice insurance renewals and quarterly and annual financial statements. But increasingly, lenders offering law firm financing want information concerning the legal side of your practice too.
What should you expect?
- Legal Audits
What is a legal audit? Unlike a financial audit, a legal audit involves providing information (public only) to your lender about your type of practice (contingent, hourly or mixed), the nature of your receivables (how often do you receive legal fees from your contingent cases, what are your monthly hourly bills and the aging of your collections), payables (again, type and aging) and importantly, other long-term and short-term debt that the firm maintains (including any amounts owed to partners).
Legal audits can take as little as a few hours and as long as a few days depending on the complexity of your cases or practice. Post-closing, they’re typically performed once or twice a year if it’s an in-person review, and sometimes more regularly if your financier evaluates your firm by phone.
Prior to the audit, you need to make sure that you and your team are prepared to discuss the key aspects of your cases—such as, public information concerning the facts, issues, procedural status, projected values and the date of anticipated resolution. Always be mindful of the potential for any breach of confidentiality by refusing to discuss any case not yet filed, or developments in filed cases that are not on the record. This will assure that you can meet both your ethical and post-closing obligations.
It’s also wise to measure the financing company’s level of legal expertise as you chose an appropriate lender. A financier with attorneys on staff who can understand your firm, your cases and your business model and who can speak intelligently about legal matters is important because it’ll save you time and increase the likelihood that your firm’s case collateral will be valued appropriately.
- Case Status Updates
As you know, your current and future case revenues are assets of your firm that support your ability to obtain financing—whether the financing is collateralized by one case or the firm’s entire portfolio. Consequently, your lender will likely ask for a case status update or current case list monthly, quarterly or annually to supplement the legal audit and reassess the value of your collateral, your borrowing needs and ability to repay amounts advanced to you.
For example, a firm with a diverse case inventory (i.e. having cases with differing causes of action, expected values and anticipated receipt of fees) generally must provide the caption, type of case, facts, cause of action, injuries and damages for each case it handles. A more refined request from a lender could ask for more significant detail, such as your projected values, anticipated receipt of the fees, your fee splits, date of injury for statute of limitations purposes, etc. If you’re a mass tort firm, this can mean providing key intake data on the claimants and specifying your role in the litigation.
If you have an internal case management system, then this type of request should be easy for you to produce at a level of detail suitable for most lenders.
However, the process doesn’t have to be overcomplicated even for a firm without such a system. The most important aspect of your case reporting, according to many lenders, is receiving information that confirms the type of cases you have, when you anticipate receiving income and how much. While projecting timing of your fees can be a difficult since it is specific to jurisdiction and case type, typically an attorney can predict a range of dates that are, of course, subject to court delays and other typical issues relating to the trial of an action.
- Fee Revenue Reporting
In between audits and coinciding with case status reporting, you can expect your lender to independently track the firm’s litigation matters through news alerts and seek payment from you soon after if maturity dates are related to case resolution. Some lenders may require monthly or quarterly case resolution reporting so that they’ll receive updates on a more structured basis.
In each of these circumstances, it’s important you limit what you provide to your lender's to public information. These are simply reporting mechanisms to help get you the best financing available to your firm and allow your lender to remain flexible based upon the situation at any stage of the litigation--not an opportunity for your lender to gain access to confidential material.
While some may view legal practice-related reporting as arduous or unnecessary, for contingent fee practices the benefit far outweighs the costs. A good and knowledgeable lender will make the process as easy as possible.
Contingent fee practices are unique from a traditional business in that your primary asset is your current and future legal fees. By requiring audits of your legal practice and regular case reporting, litigation financing companies maximize the value of your firm and the amount of funding you can receive. Learn about the steps you’ll need to take to secure a working capital line of credit for your firm in detail here.