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The continuing evolution of law firm finance

Rising billing rates for partners at top law firms may make for splashy headlines,[1] but they hardly tell the whole story. Because most firms utilize cash-basis accounting, they can recognize revenue based only on dollars actually collected. In other words, billing rates don’t determine partner payouts or revenue-based rankings, collection rates do—and collection rates are failing to keep pace with hourly rates. In 2007, firms collected 94.6 cents for every dollar billed by their lawyers. Now, firms get only 89.1 cents.[2]

Law firm finance in 2017

Unmet collection expectations and payment delays have caused law firms to seek new options, one of which is securing capital to finance legal receivables via acceleration or monetization.

Legal finance providers can accelerate a portion of a firm’s outstanding hourly or contingent-fee receivables. This allows hourly firms to recognize the revenue they receive immediately, regardless of when clients pay outstanding bills. It also applies in contingent-fee matters where the legal issues have been resolved but payment of the judgment or settlement—and thus the fee—is delayed for some reason, such as a court approval process or deferred payment under the terms of the settlement agreement.

When additional legal proceedings make the timing (or even the ultimate receipt) of the fee uncertain, finance providers can monetize some or all a firm’s contingent receivables. Under this arrangement, a firm can immediately monetize part of its fees from a win at trial to diminish the risk of a negative appellate outcome.

What to expect in 2018

According to Burford’s 2017 Litigation Finance Survey, only one in ten lawyers reported that they would seek capital to finance legal receivables, making it an area with tremendous potential for growth. Along with other tools in the legal finance toolbox, this may lead to fundamental shifts in what has come to be accepted as standard practice for law firm financing, Indeed, the founding partner of a successful litigation boutique whom we interviewed in 2017 remarked, “There are many firms that have run lines of credit for years and they are used to seeing the world in that way. In many ways financing based on portfolio management makes more sense. You’re making a bet on the firm. It’s understandable that that’s a growth area.”

In the coming year, we expect more firms to make use of acceleration and monetization finance. These solutions do not create debt for law firms, and financing is typically non-recourse: If a client ultimately does not pay or a fee never materializes, the law firm has no obligation to repay the finance company. At the same time, the law firm’s standard collection processes remain in place, and the transaction does not require the financing company to contact clients.

When parties enter into a transaction, the finance provider will grant the law firm immediate access to the agreed-upon amount of funds, which can be used for virtually any business purpose. Firms can use the capital to pursue new areas of business, to offset financial uncertainty or as an alternative to the often frustrating and profit-lowering year-end collection cycle.

[1] Sara Randazzo and Jacqueline Palank, “Legal fees cross new mark: $1,500 an hour”, The Wall Street Journal, 9 Feb. 2016. Available at https://www.wsj.com/articles/legal-fees-reach-new-pinnacle-1-500-an-hour-1454960708.

[2] “2017 Report on the state of the legal market”, Georgetown Law Center for the Study of the Legal Profession and Thomson Reuters Legal Executive Institute, 12 Jan. 2017. Available at http://legalexecutiveinstitute.com/wp-content/uploads/2017/01/2017-Report-on-the-State-of-the-Legal-Market.pdf.