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Legal finance: The year-end financial tool law firms need

  • Nicholas Cooper

Law remains a cash business. In this day and age, that not only makes the industry unique when compared to corporate peers, but also creates distinct challenges for law firms—especially given the prevalence of the hourly billing model.

For matters taken on contingency, waiting months or years to receive payment is an accepted if uneasy reality. For matters billed by the hour, however, waiting for payment is less of an expectation. When the system works well, lawyers collect their full fees and continue doing what they do best. But all too often, when the system does not work well, lawyers face an unhappy situation: They may be forced to turn their focus from practicing law to collecting from clients who, for one reason or another, might delay on repayment of billed hours.

Come November and December, hourly and contingency fee lawyers alike may find themselves in a crunch to recognize as much revenue as possible before the end of the year, and not just because of the impact on their own performance and compensation—but more broadly, because of the potential impact on their firm’s AmLaw rankings.

To avoid forgoing the fees for the current year altogether, hourly lawyers may harangue their clients until they receive payment or else offer steep discounts on their fees in exchange for receiving prompt payment. In the first instance, time gets wasted (and client relationships may be damaged in the process); in the second instance, law firms set the undesirable precedent with their clients that they are willing to accept lower-than-expected fee payments, should clients stall long enough. Contingency fee lawyers have even less leverage but may be persuaded to accept less-than-ideal terms from non-specialist lenders.

Fortunately, Burford offers law firms an alternative: Accelerating year-end legal fees with legal finance. In this context, litigation finance enables hourly and contingency firms to accelerate expected fee income and can offer an alternative to firms as they approach the end of a fiscal year or partnership distribution dates.

What is fee acceleration?

Fee acceleration allows law firms to reduce time to money; firms can recognize revenue immediately by selling all or part of receivables to a third-party finance provider at a small discount, regardless of when clients pay outstanding bills. Fee acceleration can be applied to normal course hourly billing from blue-chip clients that have long billing relationships with the law firm.

Although pricing is determined by a variety of factors following a period of in-house diligence, the cost of Burford’s capital is generally cheaper than the discounts firms would offer to their clients—meaning firms keep a larger portion of their earned fees, without the potential of damaging their relationships with clients.

Why should law firms use fee acceleration?

Fee acceleration from Burford obviates end-of-year billing problems for law firms on three levels. Lawyers can:

  • Dramatically speed up the monetization of their receivables, saving time, creating certainty and ensuring current year revenue is recognized
  • Save hourly law firms the time and effort of haggling with their clients—thereby preserving relationships
  • Avoid setting the dangerous precedent of taking discounts on legal fees in the name of receiving prompt payment from their clients, creating a moral hazard for future dealings

Fee acceleration does not create debt for law firms, and financing is typically nonrecourse—that is, 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.

Conclusion

Fee acceleration is a simple, cost-effective tool that allows law firms to maximize revenue, maintain healthy client relationships and keep lawyers focused on doing what they do best: Practicing law—not collecting bills.