The results are in.* Law firm revenue is increasing and the majority of firms are focused on growth again following the pandemic. Now is the time to consider three legal finance options that support your firm’s growth.
Legal finance was traditionally thought of as a risk mitigant to turn to during challenging times or as a niche solution for clients struggling to pay and firms needing to improve cash flow. With industry average debtor days remaining at +60 days, legal finance can still certainly help improve cash flow, but the industry has come a long way and that’s a positive for firms and clients.
Increasingly, ambitious law firms and their clients are turning to a range of legal finance options for more positive reasons. These include driving growth by attracting and converting more clients, offering greater flexibility to clients, improving access to justice and focusing on better client relationships and retention.
Clients now expect the same level of payment flexibility from their lawyers as their eCommerce or retail providers, so it’s easy to understand why client demand is also driving the adoption of legal finance.
Below we outline three legal finance options to consider to support your firm’s growth.
Option 1 – Invoice Financing
How does it work? Typically an agreement between the law firm and finance provider, but may also include a tripartite agreement including the client. The law firm receives 100% of the value of the invoice from the finance provider immediately, and the client is able to spread payment of their fees over time plus interest.
Pros? Improves cash flow. Clients are able to pay each invoice over a period of time, for example, 3-12 months.
Cons? Repayment is guaranteed by the firm which may not be an attractive option as firms ultimately bear recovery risk.
Recommended for? Discrete matters, commercial matters and non-litigious matters. Multiple instalment repayments can be “stacked” on top of each other, which may negate the benefit of deferring invoices in the first place depending on the client.
Option 2 – Buy Now, Pay Later (BNPL)
How does it work? Agreement between the law firm and BNPL provider, and the BNPL provider and the client. Clients are able to pay each invoice in equal instalments over a period of time with “0% interest”. Law firms are paid upfront by the BNPL provider the value of each invoice minus a merchant fee.
Pros? Quick approval processes based on an assessment of client’s income and affordability. Improves cash flow and shifts recovery risk to the BNPL provider because repayment is not guaranteed by the firm.
Cons? The payment deferral period is short (typically fortnightly or monthly), which may or may not be appropriate depending on the client and the matter.
Recommended for? Discrete matters and non-litigious matters given, similar to above, multiple instalment repayments can be “stacked” on top of each other.
Option 3 – Legal Loans
How does it work? Law firms receive 100% of the value of the invoice from the legal loans provider. Clients are able to defer payment of their fees until the resolution of their matter.
Pros? Improves cash flow and shifts recovery risk to the legal loan provider because repayment is not guaranteed by the firm. A long deferral period and the ability to pay from the proceeds means this option supports access to justice for people who otherwise couldn’t afford to pay.
Cons? Interest charged to the client can be higher.
Recommended for? Family law matters and litigation matters.
There has been an explosion of new legal finance providers in Australia in recent years, as firms begin to realise the role that legal finance can play to support growth. Firms and clients have more choice than ever before, so it’s important you consider the pros and cons of each, and what is in the best interests of your client.
*2021 Annual financial performance survey for Australian law firms.
About the author
Jack O’Donnell is one of the co-founder’s of JustFund – Australia’s only specialist provider of legal loans for family law matters. JustFund’s team are lawyers and legal finance specialists on a mission to enable people to access great lawyers, and law firm owners to build great businesses, by providing a fair, flexible and affordable way to manage legal fees. Visit www.justfund.com.au to find out more.