Plaintiffs’ law firms take cases on a contingency basis and frequently face defendants with deep pockets who can afford to wait their cases out. The COVID-19 crisis has added even more uncertainty to the litigation process and cash flow for law firms.
Large amounts, often in the hundreds of thousands of dollars can come due for plaintiffs’ law firms incurring expenses during drawn-out cases, especially for cases with multiple plaintiffs and cases where expert testimony is required.
For contingency cases, the large sums of law firm capital that are tied up in case costs for many years can limit law firms’ ability to utilize that capital for business expansion or to invest in other fee-generating cases.
Unlike traditional businesses, law firms cannot simply raise capital for operating expenses. Current legal ethics rules prohibit non-attorneys from taking ownership interests in law firms, which eliminates the use of securities as a funding option and while attorneys can borrow funds, it often must be from a non-traditional lender because a potential litigation victory generally falls outside the scope of what is considered acceptable collateral.
This often leads law firm management to pursue alternative lending options from non-traditional lenders like litigation financers or specialty lenders, who emphasize their core differentiator is that they can use a law firm’s case inventory as collateral – however, this often comes with a less-competitive interest rate than traditional banks.
Ari Kornhaber, Esq., Founder, Executive Vice President and Head of Corporate Development at Esquire Bank provides insight on financing options for plaintiffs’ firms and how to ensure your law firm approaches it the right way.
NLR: How have you seen contingency fee law firms maintain their businesses throughout the pandemic?
Kornhaber: The pandemic has forced many trial lawyers to take an honest look at themselves and often rethink their business models. Decisions that made sense pre-pandemic may not make sense now, especially in today’s low-interest-rate environment. As a result, contingency fee law firms are examining whether their current approach to law firm capitalization makes sense. Many lawyers that I speak to are taking a more proactive approach to how they run their business.
NLR: As we emerge from the pandemic, what are plaintiff’s firms worrying about most?
Kornhaber: Now more than ever, lawyers who run contingency fee law firms are concerned about the future. There is a general feeling out there that their businesses haven’t fully felt the effects of the pandemic yet, due to the nature of the business. Cases that are signed up today won’t generate revenue for months or years. The decline in intakes months ago, won’t truly be felt for months, a year, or more. This has self-financed law firms particularly concerned, as their nature is to be debt-adverse. For these self-financed firms, the combination of intakes being down and cases taking longer to settle means they will have to dig deeper into their own pockets. Meanwhile, other law firms with access to capital are using this time to move their businesses forward by investing in new legal technology, infrastructure, and talent.
NLR: What are some key takeaways self-financed law firms should know about their borrowing options?
Kornhaber: The current economy has created a low-interest-rate environment. Going to your bank and asking them what they can do for you is the first thing self-financed firms should do. It is important to note that banks covet law firms as customers because they come with low-cost deposits. Also, trial law is an industry that is classified as ‘recession proof’. Banks and lenders are trying to put their best foot forward for new law firm clients – so there is no better time than right now to speak to a bank to see how they can help.
The catch, however, with speaking to a traditional bank is that they rarely use the value of your case inventory as collateral for lending purposes. This means they will look at your previous financial performance to come up with how much they can lend you – ignoring the revenue your law firm will generate via the cases that are in your inventory today and tomorrow. The final amount of credit offered is often not enough for many lawyers.
NLR: What about specialty litigation finance companies?
Kornhaber: Specialty finance companies play an important role in the equation, as they can often lend to law firms that the traditional banks often ignore. Specialty legal finance companies are more likely to take on these ‘riskier’ clients, but usually at much higher interest rates and fees as compared to banks to compensate for the additional risk.
Higher risk law firm clients frequently have exhausted their options with the ‘mega banks’ and are struggling to fit into the box suited for other types of businesses. A next step after traditional lenders is law firms often speak with finance companies and lawyers are often surprised at the interest rates, fees, and terms they are offered. Often by the time they get to a lender like Esquire Bank, the first question that’s asked out of exhaustion and frustration is – what kind of interest rate can you give me? Although our interest rates are some of the lowest in the industry, there’s a lot more to the conversation. There is real value to working with a financial business partner that has a deep understanding of the business of law and the unique financial challenges faced by contingency fee law firms.
NLR: What factors should be considered when assessing case-cost financing?
Kornhaber: First, project your firm’s cash flow for the next 12, 24, and 36 months. Take into consideration the reduction of new case intakes and possible court delays to figure out what your financial position is going to look like over the next few years. Ask yourself what you need to survive, then what you need to thrive and invest during a ‘down market’ to come out on top. Being realistic is extremely important.
Understand how much money you have out on the street today in your case costs, then figure out how much more money you’ll need to spend on case costs over the next 12 months. This helps you to understand what you will need to commit from your self-financed ‘piggy bank’ to continue your winning record for your clients.
Then, figure out what your average balances are in your depository accounts. If you take this information to your lender, they may try to help you in a meaningful way, especially if you’ve been with them for many years.
Finally, ask yourself if you really need to pay for your clients’ case costs using your firms’ after-tax dollars and whether you could instead, use that money more effectively in other activities that will help your law firm grow. Law firms that leverage case-cost financing often report that they achieve better results for their clients because they have the financial backing to go toe-to-toe with their deep-pocketed adversaries without having to think twice about bringing in the best, most expensive experts. That leads to the greatest results and ultimately justice and maximum compensation for their clients.
- Ari Kornhaber is the Executive Vice President & Head of Corporate Development at Esquire Bank. Join Ari and a panel of experts at Esquire’s upcoming complimentary webinar, ‘Bold Moves: Growing your Contingency Fee Law Firm Post-Pandemic’ on June 15: Save your spot.
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