What is your Opportunity Cost of Self-Funding?
Webster’s Dictionary defines “Opportunity cost” in economic terms as “the opportunities forgone in the choice of one expenditure over others.”
In deciding the best way to finance a law firm, financial analysis proves that benefits of borrowing for litigation costs far outweigh the interest expense of a loan. If you can increase the value of your case by borrowing for case expenses and the incremental value of the case is greater than the cost of the loan, then you have made a wise investment. Similarly, if you borrow for marketing and advertising campaigns, which results in new cases that earn fees in excess of the borrowing expense, that too is a smart investment.
To illustrate this analysis, we often see two types of attorney financial management styles at Case Funding, each with their own investment / return profiles:
The Litigator – The Litigator’s goal is to weather the storm of defense’s low settlement offers and sometimes unlimited spending capability on depositions and experts before the facts of the case are known. This attorney prepares every case as if it will be going to trial – both intense time and financial resources are committed to fortify each case with impeccable research, experts, and strategy to the point where the defense will not wish to risk loss at trial. The attorney commits case expenses that have a direct impact on the value of the case at trial – for instance acquiring several expert testimonies rather than only one or professionally prepared trial exhibits that would succinctly relate the plaintiff’s damages to a jury. The strategy is to allow the case to get to a high enough case valuation that the defense reaches its tipping point – where the cost and risk of bringing their case to trial will far exceed a rational settlement.
Expense Profile: HIGH
Revenue Cycle: LONG GAPS
Strengths: These attorneys are very effective at winning cases at trial and earning high settlements.
Opportunity Costs: Commits time and cash resources of the firm to only a few cases ultimately concentrating the firm’s risk of loss. These attorneys forego expansive marketing programs and keep a trim case load.
Weaknesses: Traditional banks may be wary of extending financing to this attorney. Banks are unfamiliar with determining case values of contingent fee law firms and their unpredictable cash flow.
Benefits of Borrowing: This attorney understands that their case value and/or settlement offer increases incrementally in direct relation to their committed case costs.
The Marketer – This attorney’s goal is to play the numbers game. Identify high value cases, generate leads, qualify & retain the client – repeat. These attorneys have unlocked the secret to pulling leads in their niche case types and have built strong relationships with other law firms happy to take their vetted leads for a fee split arrangement. These attorneys are ‘people’ people, they know how to reach clients in need through cost effective marketing programs, they can harness technology and process to perform thorough and methodical intakes, and they have won the trust of their peers that their referrals are matches made in everyone’s best interest.
Expense Profile: HIGH MARKETING/LOW CASE COSTS
Revenue Cycle: IRREGULAR
Opportunity Costs: Without keeping a number of cases in-house, this attorney is always taking a percentage of a percentage.
Strengths: When large class action and mass torts cases settle, there is often a large reward to be had.
Weaknesses: There is often a very long lag time between signing clients and settlements, often several months or even many years. Marketing expenses are incurred upfront – while fees are earned at an unpredictable point down the road.
Benefits of Borrowing: During periods with limited cash flow, borrowing allows for the firm to continue its marketing campaigns.
The Bottom Line: In these operating styles, the remedy to recapture missed opportunities for the law firm could be to infuse more capital into the firm. When the Marketer borrows to maintain a high volume of intake while trying the cases they want to take on or the Litigator is able to turn to financing to cover their case costs – they are able to recapture those missed opportunities and offset their opportunity costs.
Where to Obtain Legal Financing and Attorney Funding: Try your bank first. Banks certainly have been the traditional source of financing. Unfortunately, regulators frown upon lending against contingent receivables these days and banks have virtually withdrawn from the marketplace. To address this liquidity gap, specialized lenders have emerged to serve the legal community exclusively. These “Legal Finance” firms provide working capital loans and lines of credit to attorneys and law firms, only relying on the future fees they will generate to get repaid.