For a law firm that practices contingent litigation managing cash flow is vitally important. Sadly managing ones cash flow is an afterthought for most trial lawyers. Cash flow is very sporadic as they only get paid when cases are successfully concluded. With many cases taking years to bring to conclusion projecting ones cash flow can be a daunting task.
Contingent firms typically advance all of the cost of litigation upfront in exchange for a percentage of the recovery. In a contingent case a firm may invest hundreds of attorney hours and tens of thousands of dollars into a case. If a firm loses a case it loses not only its time but the cash invested in hard costs as well. It gets worse, a firm is not allowed to deduct the money they have tied up is case costs. Not only do they have to fund the money up front but they have to fund it with after tax dollars. Then they repeat the cycle and plow the fees from successful cases into the next group of cases.
The missing ingredient in improving cash flow for most contingent law firms is something most businesses have been utilizing for decades. Leverage. Most lawyers have funded costs out of pocket since they started, only because that’s how it has always been done.
A revolving line of credit can be one of the most important tools in a plaintiff lawyers fight for justice. By using borrowed money to fund litigation expenses a firm can eliminate the negative tax consequences of self funding. The firm actually realizes the income it is receiving in fees. Any interest a firm pays can be offset by having the money that was tied up in case costs available for firm expansion or outside investments. But the biggest advantage is no longer using after tax dollars to fund case development expenses.
We are in a time where trial law firms have more options than ever when it comes to financing their practice, from traditional banks and specialty finance companies to legal finance consultants. Contingent lawyers can and must pay attention to the bottom line if they wish to continue helping their clients.