Top 5 tips for using disbursement funding in 2017
Now that the intensity of the Christmas period has passed and the industry is emerging from the January hiatus, it’s common for SME law firms to reflect on business from the previous year and plan for the year ahead, writes Anthony Hersch.
We expect there will be two main areas of consideration for SME law firms for 2017:
1. Managing cash flow
For all small businesses, managing cash flow is crucial. In the legal space, we continually find that for the large part, this dictates SME law firms’ capacity/ability to generate revenue and in turn growth. Typically, third-party costs (disbursements) are a cash flow drain and tie up working capital.
2. Facilitating business growth
Facilitating growth consistently goes hand in hand with managing cash flow. The optimal situation is for working capital to be released and redirected into the business to increase turnover. Growth can occur through a variety of means, whether that be additional staff, more marketing, etc.
When considering the year ahead, we encourage SME legal firms to utilise disbursement funding to help boost the organisation’s operations, sustainability and future earning potential.
In a nutshell, disbursement funding is the provision of finance for third-party costs (disbursements) that form part of any litigation. These include medico-legal and radiology reports, court appearance and filing fees, barrister fees and all other expert reports/expert witness fees. The reason this financial product is powerful is it allows the law firm to defer payment of disbursements until settlement (or up to 30 months – whichever comes first).
The effect of the financial solution is significant: disbursement funding removes the immediate barrier to business growth by enabling access to capital.
Here are our top five tips for using disbursement funding to achieve growth without cash flow implications:
1) B2B v B2C funding: Consider the benefits of a B2B v a B2C disbursement funding product in relation to client conversion rates. B2B funding enables lawyers to retain their client relationships with no onerous loan documentation that’s required when involving claimants (and thus rarely impedes conversion).
2) Terms of trade: Consider what the funder’s terms of trade are, to include whether personal guarantees and/or claimant involvement are required (this is largely affected by whether the funder is B2B or B2C). Utilising disbursement funding shouldn’t be complex or time-consuming.
3) Speed of invoice funding: Timing is everything. Be sure to understand the expected turnaround time for third-party invoice payment (should be 24 hours) and corresponding receipt of reports.
4) Fee structure: Ensure that all fees are openly disclosed to avoid surprises. This includes asking whether the disbursement funder charges account-keeping fees, annual fees, drawdown fees and/or penalties if matters become protracted.
5) Financing model: There are a number of financing models available for disbursement funding. Knowing the fully funded cost up front is the simplest option. The alternative is a moving target and involves complex calculations of the financing component leading up to settlement.
The upside of disbursement funding is clear. Use it to release capital constraints, take on additional cases and generate more revenue. We encourage SME law firms to take advantage of this smart alternative in 2017.
Anthony Hersch is the general manager of disbursement funding at JustKapital Litigation Partners. ASX-listed, JustKapital is an established market leader of litigation and disbursement funding in Australia. Its disbursement funding business division is geared to provide financial solutions to small to medium-sized law firms.