For law firms that practice contingent litigation managing cash flow is critical. Unfortunately managing cash flow is an afterthought for most trial attorneys. Cash flows are very sporadic as they are only paid when the case is successfully resolved. With many cases taking years to complete, projecting cash flow can be a daunting task.
The contingent company usually advances all litigation costs up front in exchange for a percentage of recovery. In contingent cases, a company can invest hundreds of attorney hours and tens of thousands of dollars into a case. If a company loses a case, it loses not only its time but also the cash invested in hard costs. Worse, companies are not allowed to deduct the money they have tied up is the case fee. Not only do they have to fund the money upfront but they have to fund it with after-tax money. Then they repeat the cycle and plow the costs of the successful cases into the next batch of cases.
The missing ingredient in increasing cash flow for most contingent law firms is something most businesses have been leveraging for decades. Benefit. Most lawyers have funded their own fees since they started, simply because that’s how it’s always been done.
A revolving line of credit can be one of the most important tools in a plaintiff’s attorney’s fight for justice. By using borrowed money to fund litigation costs, companies can eliminate the negative tax consequences of self-financing. The company is fully aware of the income it receives in the form of expenses. Any interest the company pays can be offset by having money tied up if the costs are available for company expansion or outside investment. But the biggest advantage is that it no longer uses after-tax dollars to fund case development costs.
We are in a time where probationary law firms have more options than ever when it comes to financing their practice, from traditional banks and specialty finance firms to legal finance consultants. Contingent attorneys can and should pay attention to the bottom line if they are to continue to help their clients.
