In this blog, we feature insights into why you shouldn’t be a lawyer and a lender.

How does your firm pay for case disbursements? Do you use the after-tax dollars you’ve earned from previous cases to cover the necessary disbursements for current cases?

Many law firms unintentionally hamper their ability to grow through the practice of self-financing their case costs, using their earnings from previous cases to pay for current cases. However, this is not an efficient use of your after-tax dollars and reduces the firm’s ability to invest in growth initiatives such as hiring, marketing, or operations improvements.

As a law firm growth consultant, Chad Dudley — Managing Partner of Dudley DeBosier Injury Lawyers — has seen firsthand the crippling effects self-financing case costs can have on growing law firms. To learn more about why you shouldn’t be a lawyer and a lender, watch the webinar short below.

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View the Full Video Transcript

[ARI KORNHABER]

One of the attendees today asked about case cost financing and some suggested language for the retainer agreement in case they want to pass through the interest to their client and treat that as a case cost. I have to tell you from where I sit it’s one of these bold moves coming out of the pandemic, more and more law firms are saying “I don’t want to be a lawyer and a lender anymore to my clients, I don’t want to pay for my case costs with my after-tax dollars, that’s not smart money”.

I know you’ve mentioned jumping into this type of debt with two feet and from your perspective as a consultant, what are your thoughts on financing disbursements? You know I find it very interesting because I think it’s not understood that you can finance your disbursements and pay the interest yourselves or finance the disbursements and have the interest calculated for you and pass it through to the blind.

There’s different options, either way it’s better than using your own money it’s kind of like the analogy that i came up with if I said to anyone on the webinar today that you have equity in your home. Let’s say you have a two million dollar home and you have a million dollar mortgage and I said you could borrow a million dollars and have someone else pay the principal and interest. Would you consider that most of them would say, I would actually become more educated on that and see if it’s ethical and responsible and how it works. That’s an opportunity for contingency fee law firms. What’s your perspective on this?

[CHAD DUDLEY]

It’s indisputable. Growth takes up a lot of cash and you grow your firm by increasing the value of your cases or getting more cases in the door. Both of those things require cash so you know having a banking program that understands the business, understands the industry and understands you. When I work with firms and I go in there they’re financing their case costs. It puts a crunch on what they can do to grow their firm. In other regards, whether it’s  marketing, whether it’s hiring another trying to handle cases that have come in the door. It really cripples them and so we’ll look and go, let’s free up this cash.

Now, we’ve decided we’re going to disclose to the client where each state has different bar rules but in our state we’re allowed to pass out a certain amount of interest to the client. Now, we can’t earn interest as a firm, even if it was our own dollars, that’s precluded from doing that. But we can go to a bank and say here’s the interest rate, disclose it to the client and understand that when we use incorrect costs in your case, this is how we’re going to be doing it. 99.9 percent of the time it’s not even an issue. If it’s an issue at any point during the disbursement, often we’ll just wave that interest and we’ll pay it but it we would not have been able to grow as a law firm like we have without doing it that way.