“Whether you’re looking to start your own firm, shore up your existing practice’s cash flow, or fuel your growth, law firms of all sizes and specialties can benefit from an infusion of working capital.”
Whether opening a new law office or expanding an existing one, there is an essential ingredient beyond the law degree and law license that every firm must have, and that, of course, is adequate financing. Because law firms do not possess an inventory of goods against which a loan can be secured, creative financing that is unique to law firms has been developed.
Law firm funding can include investment in the positive outcome of promising litigation; however, the sharing of client and strategy information with a lender or investor can itself raise ethics issues. We will explore how best to utilize external funding for law firms.
Capital Infusions
Non-asset-based capital infusion is the type of financing typically used in the legal profession to cover litigation expenses, to improve cash flow, and otherwise simply grow the practice. Law firms operate very differently from other types of businesses and have unique revenue models. Therefore, law firm financing must be uniquely tailored to the nature of law firm cash flows and revenues, whereas more traditional financing might not provide a solution. Due to the uncertainty of litigation outcomes, law firms rely on non-recourse financing whereby the lender agrees to only receive repayment from the profits that a file generates as opposed to holding the partners personally financially liable.
Funding the New Firm
Often times lawyers tend to ‘think big’, and having long-term goals in mind when first starting out is always admirable. However, most experts recommend that when a new firm is being formed, the big picture should give way to the practicalities of: ‘Where do we want to be in one year, and how do we get there?’ That means obtaining adequate funding for such basics as office rent, utilities, furnishings, technology and at least part-time support staff. Because the first year will go by quickly, it is always best to have ‘year two’ laid out as well, with a growth factor built in.
For lawyers starting a new firm after coming from a large, well-established firm, there can be a tendency to try to replicate all of the features of that firm. Bear in mind that the appurtenances of the larger firm were not acquired overnight, and if big firm financing philosophies and ‘flash’ are applied to your small firm when starting out, there is a real risk of hemorrhaging money before your endeavor has a chance to get off the ground.
Recession, Boom, Or In Between
The success of law firm funding can be dependent not only on where your financing is applied but also on when you make use of third-party funding. It is, of course, always riskier to open any new profession while the economy is in a downturn, but if circumstances force you to do so in that economic environment, then the realities of a more restricted cash flow and slower growth prospects must be factors that are taken into consideration vis-à-vis funding and spending goals. Opening a practice during boom times will not only make funding sources more readily available but will also give you the advantage of being able to point to a bullish legal market when soliciting those funds. As a practical matter, firms tend to rein in elective spending during downturns so as to concentrate on the necessities, but just what constitutes ‘absolutes’ versus ‘options’ will vary depending upon how well-funded the firm is at that point, and what the prospects are for a quick revenue turnaround.
Accelerating Firm Growth
The main benefit of law firm financing is the acceleration of growth by providing the firm with the funding necessary to promote business, improve cash flow, enable top-tier client servicing, and hire top legal professionals. As with other types of business loans, law firm financing is crucial to meeting goals for growth and scalability. As part of a firm’s goals for growth, investment in technology, staffing additions, and even office expansion are all part of a growth strategy that requires serious funding.
Investment in Marketing
Implementing marketing channels can improve growth prospects, and among the marketing approaches that lenders can relate to are SEO campaigns, pay-per-click advertising, mass media advertising, hiring marketing strategists, subscribing to tool services, and the creation of podcasts and blogging.
Litigation Funding
Litigation funding (also referred to as disbursement funding) covers costs incurred while defending a client or prosecuting a client’s cause. Among the litigation expenses that may very well need deep pockets in order to effectuate successful litigation are the costs of expert witnesses, filing fees, arbitration fees, forensics and laboratory testing, and travel related to the taking of depositions and meeting with witnesses. Proceeding with interlocutory appeals along the way when relevant and funding appeals from adverse judgments can also be quite costly undertakings.
Ethics and External Funding
Various ethics opinions provide guidance for lawyers looking to external sources for their litigation funding. In particular, the attorney’s obligation to safeguard a client’s confidential information might be compromised in the course of disclosing both the necessity for the litigation funding and the strategies that will be played out—elements that a third-party funder will most likely want to be disclosed in much detail in order to feel assured that the investment is worthwhile. Understanding how to make the requisite disclosures while adhering to client confidentiality obligations is a must for attorneys who do not wish to run afoul of their professional liability responsibilities.
Resources Leading to Reward
With the median annual income of an attorney currently standing at $131,990—well above the national average—starting and growing a law firm is a wise and lucrative choice. But in order to succeed, both the tools of the profession and the presentability of your particular impact must be well-funded upfront. Fortunately, a wide variety of funding opportunities are available for today’s lawyers that did not exist just twenty years ago. The ambitious, innovative professional would do well to plan carefully how to make the most of this golden funding environment.
Executive Summary
The Issue
How to effectively deploy available external law firm funding?
The Gravamen
From start-up to established firm expansion, having in place a realistic game plan will not only sway lenders but also help make the most of every dollar funded.
The Path Forward
Working capital, litigation funding, and expansion financing are all legitimate funding targets that third-party lenders will relate to if properly prepared and presented to them.
Action Items
When to Fund:
Decide whether the current economic environment is the right one for starting up or expanding your practice.
Set Realistic Goals:
Assuming the timing is right, consider the practicality of your timeline markers, whether for opening a new firm or scaling for growth at your established firm.
Pitching Your Funding Needs:
Different lenders have disparate notions as to just what should be funded at a law firm, and it is, therefore, incumbent upon you to do your homework and determine which funding targets appeal to which lenders.
Navigating the Ethics:
No amount of funding is worth risking either your license or your reputation, and it is therefore, essential, to learn what your local canon of ethics has to say about disclosures in the course of applying for litigation funding.
Further Readings
- https://www.pullcom.com/newsroom-publications-Litigation-Funding-Ethical-Considerations-for-the-Plaintiffs-Lawyer-Co-author
- https://www.nationalbusinesscapital.com/blog/law-firm-financing/
- https://lawrina.org/blog/law-firm-financing/
- https://lawyerist.com/starting-law-firm/funding-financing/
- https://lawfirmambition.co.uk/topics/finance-and-accounting/law-firm-financing-options
