How the Changing Landscape of Legal Funding Affects Contingent-Fee Law Firms

September 9, 2014Diana Lengerson

Starting a small business is always a risky venture. When you consider that over 80% of all small businesses end up failing, you might think twice before starting one. But, what if your business model only allowed you to get paid if the client was satisfied with your services? Imagine operating a restaurant and only being paid if your patrons enjoyed the meal and left the establishment full.

This is essentially what contingent-fee law firms have to deal with. They take on cases (generally personal injury claims), and are only paid if the trial ends in their client’s favor. Of course, providing legal representation isn’t free. Trial lawyers must often pay for expert witnesses, illustrative graphics, and anything else that might help their case before ever being paid themselves. These costs can range as high as tens of thousands of dollars. So, where exactly are they getting this funding?

In some cases, small contingent-fee law firms can finance their cases out of their own pockets through the use of either after-tax cash or credit cards. In fact, most law firms self-finance under the impression that any type of loan or line of credit could cause more problems than solutions. But, law firm financing is a burgeoning industry, and it may be the answer for many struggling contingent-fee law firms.

Of course, more traditional forms of legal funding range from a conventional bank loan to partnering with other law firms. Conventional bank loans are often difficult to secure without some leverage. If your law firm has limited collateral, then a bank will likely be unwilling to loan you money based on the increased risk. In some cases, partners must use their own personal assets as collateral to secure a loan from a bank.

If a bank is unwilling to take on the risk associated with your case, then you may be able to partner with another law firm. In most cases, a smaller law firm will seek out larger law firms to secure funding for their case. But, a law firm partnership might reduce your total payment if you do win.

Even so, there are numerous other sources of legal funding to be had. In Michael J. Swanson’s 2011 book, How David Beats Goliath, 10 sources of legal funding for contingent-fee law firms are outlined. Swanson, who attended both Ohio State University and Cleveland State University and is the current CEO of Advocate Capital, Inc. takes a look at the business side of law firms every day. In his book, he offers advice and guidance for contingent-fee law firms. He dispenses his wealth of accounting and financial knowledge and details exactly how to secure capital to effectively represent clients.

Advocate Capital, Inc. of course, is firmly entrenched in the field of law firm financing. They are part of a new trend in the legal funding world often referred to as Alternative Litigation Financing (ALF). Businesses like Advocate Capital, Inc. specialize in providing funding for contingency cases. Thus, Swanson has a lot of experience with the financial statements and tax returns for contingent-fee law firms.

Many law firms may be wary of new forms of funding, but the fact remains that cash is an integral part to the success of their business. Even though most trial lawyers don’t have any business training, it is important for them to exercise caution and listen to financial experts. Ample funding means that law firms will be able to represent their clients more effectively, win more cases, and eventually be able to finance their own cases with ease. But, for many contingent-fee law firms, working independent of third-party funding is not yet feasible. Whether they get their money through banks or alternative means, contingent-fee law firms are almost always going to be looking to secure capital for their cases.

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