To overcome risk concerns and perceptions by lenders, contingency fee law firms need to know how to present a strong, contingent case pipeline. This effort can be challenging since the cash flow cycle of a contingency fee law firm’s business is inherently irregular.

Overcoming Traditional Banks Inability to Value Case Inventory

Many commercial, big-name banks don’t have the expertise to value the firm’s case inventory and therefore see this as a credit risk. As a result, these banks will restrict the amount of credit they will extend to the firm. Although most traditional banks will not use a firm’s contingent case inventory as collateral to lend against, law firm owners can still present the strength of their contingent case pipeline to ease any credit risk concerns.

Avoiding High Interest Rates and Fees Associated with Litigation Funding

For law firms that fund through litigation funding companies, the perceived credit risk will typically lead to an offer of extended credit at high, double-digit interest rates. Although many funding companies will lend against a firm’s contingent case inventory, law firm owners should still know how to value their contingent case pipeline independently – funding companies are not lawyers and do not have in-depth knowledge of what cases are worth.

Four Key Considerations for Presenting a Healthy Business Pipeline

1. Place estimated value and timing on cases. All cases in your case inventory should be assigned an estimated dollar value and time to resolve.
2. Extrapolate this over the next three years. For example, take the average number of cases resolved in a year multiplied by the average settlement amount. Then project this over the next three years to give your potential lender an idea of anticipated future revenues.
3. Calculate the success rate of your firm. The success rate of most reputable firms is at least between 90% to 95%. This will give your potential lender an idea of how likely it is your firm will actually achieve the projected revenues you’ve presented.
4. Separate case costs from your fees. Case costs typically come out of your client’s share of the settlement, not out of your firm’s revenue.

Watch the video above, as Ari Kornhaber, EVP and Head of Corporate Development at Esquire Bank, explains how you can create a favorable snapshot of your contingent case pipeline.