Overcoming The Most Challenging Hurdle in Contingency Fee Practice

cash flowBy Kelly Anthony, Esq., Deputy General Counsel, Counsel Financial.

Acquiring clients is the single-most significant challenge faced by contingent-fee firms, right? Wrong.

It is maintaining steady cash flow. For a contingent fee practice, funds are not received until the successful resolution of a case. Until that time (which, in many instances, could take years), plaintiffs’ attorneys are tasked with advancing all the costs and expenses associated with a litigation. Depending on the complexity of the case, such costs and expenses may exceed well over $100,000.

If your firm is doing well—having a number of cases pending at any given time—the unsteady cash flow inherent to a contingent fee practice can leave your organization in peril. Why? Because having the ability to meet immediate short-term obligations, such as payroll, office rent and taxes, is critical and, “[c]ompanies, after all, go bankrupt because they cannot pay their bills, not because they are unprofitable,” according to Richard Loth, Analyze Cash Flow the Easy Way, Forbes, Nov. 28, 2012. Thus, while a chief component of any legal practice is to generate leads, not having a steady stream of cash coming into your firm might lead to your failure.

So how do you ensure that your firm has the resources to act in the clients’ best interests and operate efficiently?

CFS_VOJ_BannerAd_4.26.16» Cut Costs

The most obvious way to boost your firm’s cash flow is to trim your expenses. Some quick ways that you can reduce costs include:

  • Staying at cheaper hotels when traveling.
  • Booking flights in advance
  • Re-negotiating lease and vendor terms and finding less-costly office space.

For a longer-term solution to saving cash, analyze all aspects of your firm’s overhead. You may be able to eliminate certain marketing and advertising tactics that are not giving you a return on your investment, or eliminate expenses that your firm no longer needs. Be wary though when reducing costs. If done incorrectly or haphazardly it may stunt the growth of your practice.

» Leverage Excess Cash

If you have a case that has resolved, but is not yet funded (and you know you will not receive the funds for some time), you can leverage your future fees to obtain immediate capital. Many companies currently offer post-settlement financing solutions, often in the form of a loan or asset-purchase. Both types of agreements are similar in that your law firm will receive a lump-sum payment at the time of closing and must pay a premium to the company once the fees are received. Post-settlement financing is best utilized for firm’s that have short-term, one-off cash flow needs as they can get pricey if used on a regular basis.

» Obtain a Line of Credit

A business line of credit is a useful tool for lasting financial management because it gives law firms years of available working capital at the exact moment they need it. By making a simple draw request to a lender, you can use loan proceeds to fund all of your firm’s litigation expenses and operations. Further, a line of credit provides you the financial freedom to continue to develop and expand your practice while your case inventory remains unresolved—leading to increased profits.

But, when choosing a lender keep in mind that traditional lenders, like banks, often do not understand the unique nature of a contingent-fee practice. Typically, when firms try to get a line of credit from a bank, they are unable to receive the full amount of money they actually need to run their business since banks do not value future fees as collateral for the loan. Therefore, many firms instead elect to get a line of credit from a specialty lender with experience working with law firms. Litigation finance lenders can offer larger amounts of financing, plus have loan terms that are advantageous to law firms.

Whether you decide to do nothing, cut costs, leverage a settled case fee or obtain a line of credit, one thing is certain—managing cash flow is vital to the health of your practice and thus, should not be ignored.

For more tips and strategies on how to effectively manage your cash flow and develop your contingent fee practice, download our exclusive whitepaper here.