Understanding Typical Lending Options for Contingency Fee Law Firms

Understanding typical lending options and how they can impact law firm growth and cash flow is essential for contingency fee law firms. In this blog we outline the three paths typically followed by trial attorneys and where they tend to fall short.

For contingency fee law firms, the ebbs and flows of a firm’s cash flow, the unpredictable timelines for settlements, coupled with rising case costs, make financial planning critical – especially in times of inflation and potential recession.

Taking a Familiar Path: 3 Typical Lending Options

To meet the demands of funding litigation costs and firm operations, many trial lawyers typically look to three lending options: self-financing, traditional bank lending, or litigation finance companies. However, each option tends to fall short due to drawbacks, trade-offs, or compromises.

With self-financing, the cost of financing case costs becomes a burden assumed by the partners out of their own pockets. While on the surface, pursuing a debt-free path may seem sound, it can be highly limiting for law firm growth by tying up significant amounts of capital for years, as well as proving to be an ineffective use of after-tax dollars.

Another approach is to obtain a loan or a line of credit from a traditional bank. While this financing method can provide credit facilities at bank rates, traditional banks won’t use case inventory as collateral. In addition to primarily reviewing a firm’s past performance as a basis for financing, traditional banks tend to require annual clean-up provisions and place onerous covenants on the firm’s partners.

A third approach, utilizing litigation financing companies, may offer law firm a more significant line of credit and use case inventory as collateral, but at a much higher interest rate, excessive fees, and greater cost to the firm. Additionally, longer case durations will impact and reduce the firm’s cash flow.

While these typical lending options sources may meet some aspects of a law firm’s financing needs, in the long run, they tend to lead to frustration, an inability to scale growth, and decreased liquidity.

A Fourth, More Effective Option

Fortunately, there are more flexible, financing solutions provided through a customized approach to each law firm’s needs, that provide capital to run a firm’s operations and capital to fuel growth. Esquire Bank understands the unique business model of contingency fee law firms and can provide expanded access to capital based on a firm’s contingent case inventory and at low, competitive bank rates.

Click above to watch the 2-minute video featuring a detailed discussion of why understanding typical lending options and how they can impact law firm growth and cash flow is an essential consideration for contingency free law firms.

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* The information provided on (or accessed through) this blog is provided for general informational purposes only and is not intended as, and should not be relied on for, law firm operations, tax, legal or accounting advice. Some of the information may not be applicable or appropriate for all law firms. Please consult your own tax, legal and accounting advisors as appropriate. Results may vary by law firm.

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