How do you fund a growing practice? It is impossible to get a successful exercise without good cases and to handle good cases to a successful conclusion requires money for working capital. So, how does a growing exercise ensure the working capital needed?
Historically, farming methods that require working capital have had limited funding options. A law practices largest and most valuable asset, their fall stock, has been of little value for financial transactions. Most companies find that the banks only lend them quite small amounts, if they will borrow at all. Banks simply do not see potential fees from cases such as sufficient collateral for a loan. They simply are not set up to evaluate this kind of collateral. This makes it all too impossible for the smaller company to fund major cases.
Earlier, the only option was to give up a large part of the fee to a financially stronger employee who is willing to finance the case.
Lawyer with a third party lawyer
This paradigm has changed with the introduction of asset-based lending to lawyers. The development of highly specialized disputes finance companies that are knowledgeable in the case and lawyer valuation now makes loans available for many practices for which no funding has previously been available. In addition, their securities are double or triple compared with traditional financial institutions.
Non-traditional lenders begin to provide loans that more accurately reflect the value of a practices eventual assets - case inventory. While the parties financial position always plays a role in a capital transaction, it is even more important the lawyers ability, record and case list.
Financial transactions with lawyers are formed by ethical issues. The mutual problem is that the law firm has an incentive to try to maximize its result to the disadvantage of representation of customers. The lawyer must maintain control and independent professional judgment: The law firm must not have any power or authority to lead or control the lawyers activities RPC Rule 1.7a, RPC Rule 5.4. Obviously lawyers can not divide legal fees with a law firm. RPC Rule 5.4 a
Different rules for professional conduct require that:
1 there must be no involvement in the lawyers independent or professional judgment or with the client-lawyer relationship, and
2 Information about representation of a client is protected as required by RPC Rule 1.6.
3 discloses third parties all information acquired under the professional relationship with a customer confidential material unless the customer gives informed consent.
If these conditions are met, a financial arrangement with a law firm is permitted if:
o Repayment is not linked to the results obtained by the lawyer
o The interest rate charged is absolute and not dependent on the outcome of the disputes.
Since there is no way of achieving this with a non-revoking transaction, the lawyer must be responsible for the loan.
Beware of Sham Transactions
There are private lenders who have attempted to avoid the restrictions imposed by the rules of professional practice by using a law firm as the management of their transactions. If the law firm offers anything but funding, this transaction is likely to be a shame and is required to comply with all appropriate rules.
Factoring fees on settled cases
It is important to point out that there is a big difference between a quota fee on an undeveloped target and a customer claim in a decisive case. Since the problems have been resolved, the latter presents no conflict provided that the transaction does not expire 2 above; The claim can be sold, invoiced or otherwise financed as any other receivables. Fees can be recharged or free of charge at very reasonable costs.
The structure of todays market
Each credit market has a hierarchy and this is no different. Prices range from about 5% for the most creditworthy to 60% for the least.
Since fall costs, including working capital, represent only a small part of the value of a case, even the highest loans, which are mainly asset-based, are very good economies for the growing company. Consider the following options for a company that needs $ 50,000 in funding to handle a $ 500,000 case with a premium fee of 33% potential fee of $ 165,000