Every business needs funding for smooth operations and law firms are no exception to the rule. Being small businesses, they face difficulties in accessing credit from traditional lenders like banks and the big financial institutions. That leaves just one source of funding for a law firm to access – unique funding solutions from alternative sources of finance. These lending agencies have designed their funding options specifically for small businesses and they make special efforts to understand the funding needs of such businesses. Law firms have their unique funding needs not just for smooth operations but also to avoid capital inadequacies from snowballing into a financial crisis.
The significance of litigation financing for law firms
Unlike what a lot of people outside the law fraternity assume, the cost of litigation can be quite high in many cases. Law firms handle multiple litigation cases in a month, quarter, half year or an entire year depending on how long the cases last. Meeting this kind of cost without any business funding solutions to support it can be very difficult for a law firm.
There are a whole lot of expenses in litigation that are not apparent to those who have nothing to do with legal services. The testimony of expert witnesses that often determine the fate of a case is expensive and so are a number of court procedure expenses. Alternative business funding is ideal to meet this kind of expenses without disrupting the law firm’s cash flow.
Delay in payments for cases that are settled
Another major difficulty that law firms face with regard to cash flow disruptions is the delay in payments for cases that have been settled in court or out of it. Ideally, the payments should be made immediately but the defendants take their time to do so. This puts a lot of stress on the operations of the law firm which looks for quick funding on easy terms to sustain operations.
Law firms try to hire the best talent from the most renowned law schools and that can be expensive. In addition to that, many firms pay off the student loans of their new recruits to check attrition. However, the recruits can repay only when they get paid. To have a steady flow of liquidity, a law firm needs business capital loans on easy terms.
Working capital cost in a law office
There is a long list of fixed expenses that a law firm has to meet to simply stay functional. Beginning with lawyers’ payroll commitments, which are among the highest in any line of work, to wages of paralegals and other sundry staff. Then there are utility costs including office rent, if the office space is rented. A steady cash flow is critical in sustaining this kind of an operation and that comes only with easy working capital funding.
Many alternative lending agencies offer non-recourse funding to law firms which is a unique option and offers very little risk of default to the borrower. Non-recourse legal funding is provided to law firms on the condition that the lender will get an agreed share of proceeds of a settled case. However, if the settlement doesn’t rule in favor of the claimant represented by the law firm being funded, the borrower is not obliged to repay the lawsuit funding. The debt is collateralized by the legal fees of the borrower.