How Litigation Finance Can Benefit Law Firms with Arrears

Written by Max Volsky | Mar 29, 2018 2:42:24 PM | 0 Comments

Written by Max Volsky | Mar 29, 2018 2:42:24 PM | 0 Comments

How Litigation Finance Can Benefit Law Firms with Arrears

Wistfully gone are the days when attorneys could set up a successful law practice with nothing more than office space, a desk and chairs, an assortment of legal pads and pens, and a peg on which to hang their shingle.  From staffing, marketing, and insurance, to an ever-growing assortment of technology and services used by attorneys in the internet-connected world, law firm operating expenses have broadened, making legal practice today a far more complicated – and expensive – endeavor than it was even a generation before.  These complexities scale upward with a firm’s size, such that medium to large law firms inevitably require a certain degree of monetary momentum to endure.  The financial upkeep of a successful 21st-century law firm can be prodigious and is only poised to grow.

At the same time, delays in cash flow are inevitable in modern legal practice, and whenever they occur, only serve to undermine further a law firm's monetary wherewithal.  One common scourge of a law firm’s bottom line is client fee arrears.  Clients can easily fall behind on payments, and when such arrears come to plague all but a firm’s largest and institutional clientele, the effect on operations and the bottom line can be debilitating.  Yet mitigating those delays can be a challenge in itself.  The time and effort involved in collection activities can siphon away billable hours, and the difficulty and stress of making multiple calls or sending several invoices or emails to collect can adversely impact both a firm's staff morale and its relationship with clients.  Achieving revenue goals while simultaneously balancing a ledger of hourly fees along with sporadic and unpredictable contingent fees can prove daunting for a law firm regardless of its size, especially as the magnitude of those fees often increase proportionally with the complexity, resources, and scope of a firm's operations. 

For other industries prone to intrinsic collection delays, one mainstream option for raising immediate capital is accounts receivable financing or factoring, where outstanding invoices are sold to a third party at a discount.  But in the legal community, where client relationships and professional reputation form the pillars of a sustainable practice, clients confronted with third-party debt collection suddenly find reason to doubt their relative importance to the firm as well as the firm's overall financial health.  Moreover, a firm's hourly clients may react negatively even to the most diplomatic of collection efforts, often meaning that attempts to obtain outstanding fees – whether made by a law firm itself or a third-party collector – will only serve to erode recurring business and dissuade its most steadfast clients, thereby worsening a firm's prospects in the long term. 

For many firms, fee arrears comprise a significant part of their accounts receivable and have rather tenuous prospects for full repayment.  Despite most firms’ efforts to collect retainers and other types of advance payments, the truth is that most firms tend to get significantly ahead of their clients’ ability to pay them, primarily due to the every-changing and time-critical demands of the underlying claims.  Unlike traditional methods of financing, litigation finance can help address the problem of arrears in several ways.  Also known as litigation funding, litigation finance involves third-party investment in a claim in exchange for an economic interest in the successful outcome of a lawsuit.  Where clients fall into arrears during the pendency of their matters, litigation finance can help carry their cases to a successful conclusion by smoothing out any gaps in funding.  In many cases, plaintiffs who receive litigation finance can use those proceeds to satisfy some or all of the arrears to the law firm. For those matters where challenges in paying legal expenses are identified early on in the process, litigation finance can ensure that arrears never occur in the first place. Unlike traditional loans, litigation finance's non-recourse nature mitigates client risk, as an unfavorable lawsuit outcome also means that, under the terms of financing, clients would owe litigation funders nothing. 

Much as the scope of technology used by the legal industry has grown exponentially into the 21st century, so too has the array of funding options available today to law firms and their clients.  The distinct advantages of litigation finance have earned it a space in the modern law firm's financial toolbox.  Where more traditional funding tools fall short or even stand to cause further harm to a firm's bottom line, law firms should not hesitate to reach for litigation funding and make it available to their clients, especially where justice hangs in the balance.

Topics: Financing Lawsuits, Litigation Finance

Max Volsky

Max Volsky is the Co-Founder and Chief Investment Officer at LexShares.