In an economic downturn, legal finance offers law firms the possibility of growing their business while reducing their risk. Thanks to single case and portfolio funding, law firms have the opportunity to receive payment for their fees, taking weight off the client and the firm, and at the same time grow their business by hiring new lawyers and retaining new clients.
Law firms can use this tool to better manage their business and focus on expanding their teams and areas of work, while working on cases under more creative fee structures. Legal finance is therefore a tool that helps turn cost centers into profit centers, transferring the risk associated with growth to a third party. The benefits legal finance has to offer are many, and we are here to help law firms realize their full potential.
Legal finance helps transform what can traditionally be thought of as a cost center into a profit center
Legal Finance: Helping Law Firms Realize Their Full Potential
The coronavirus pandemic has caused disruptions in many sectors, including the legal industry. Law firms and in-house departments are suffering from headcount reductions while at the same time they are experiencing a rise in the costs associated with commercial claims and legal disputes. They are therefore confronted with fewer resources to face an increase in cost drivers.
This paradox has created a situation in which attorneys need to look for new sources of capital so they can preserve their cash flow while at the same time work on cases, retain new clients, expand their activity and, overall, improve the management of their business.
In this regard, legal finance is a valuable tool. Also known for its synonyms, “litigation funding”, “litigation finance”, or “third-party funding”, legal finance is an instrument that allows an independent external party to invest capital in an asset with the purpose of increasing its value and benefiting from its return. Legal finance however has a broader meaning than most of its synonyms since it not only includes the funding of the costs related to pursuing a meritorious claim through its litigation, but also includes the funding of investment and international commercial litigation, the monetization of awards and judgements, and the funding of portfolios of claims of companies and law firms, or even the funding of law firms themselves. In all cases, the investment is made in exchange for part of the recoveries it generates. Therefore, legal finance helps transform what can traditionally be thought of as a cost center into a profit center.
Law firms have much to gain from external capital to fund a portfolio of its claims or even an entire practice, or the law firm itself. Legal finance allows law firms to “think big” since they can reach out to funders to cover the full cost of a single meritorious claim but they can do so for a portfolio of cases too. Additionally, law firms can also make use of legal finance to cover administrative costs, legal fees or other unrelated expenses of their business.
For example, let us think of a portfolio investment of an initial USD $ 8 million to fund a bundle of cases where the lawyers are on full contingency. These cases must always have solid merits and the law firm must have a consolidated track record of prevailing in the subject matter of the dispute. The law firm can use the investment to hire new lawyers and expand its business by attracting new clients, as the firm develops this area of specialization. This capital can also be used for the firm to take part of its fees off of contingency, adding the benefit of reducing their contingency exposure. Portfolio investments can also be turned into facilities that foresee the increase of the initial investment to add additional full contingency cases to the first bundle, allowing the law firm to continue growing.
From another perspective, we can also think of a firm that usually bills its clients based on hourly rates. Let’s imagine that a client of the firm for many years has a case that has very solid merits, but has voiced its concern over the legal fees it will face in pursuing the claim. The partner leading the case knows the client is not insolvent, but would prefer reinvesting its capital into the core of its business to generate profits in the shorter term. This partner could suggest the client to reach out to a legal finance provider to cover the expenses involved. A legal funding agreement would allow the client to pursue the case without having to confront costs but still be able to invest in its business, while also allowing the law firm to continue working on the case without taking on all the risk.
As we can see, the benefits of legal finance are manifold and in all cases it allows law firms to maintain their business and grow their practice, while balancing their risk. Moreover, law firms that choose legal finance will have an advantage over other firms since they are able to offer better services and fees, and grow their practices.