American Law Firm Funding, LLC (“ALF”) Equity-like Model
Since the Great Recession of 2008, the financial world and its related impact on plaintiff law firms have changed significantly. Fortunately entrepreneurship is still alive and well in the United States. Several new law firm funding models have emerged over the last few years to assist plaintiff law firms acquire the needed capital to execute and grow. Below are a few of these new legal funding models.
As experienced entrepreneurs of national, international and Fortune 500 companies, the executives of American Legal Funding, LLC (ALF) have created an Equity “like” law firm funding model for plaintiff law firms. The ALF model highlights many more flexible terms when compared to traditional banking models and is similar to a venture capitalist’s approach, with all of the benefits that type of model brings, but without the control, restrictions, equity loss or dilution of a typical VC or law firm partner model. The goal of the ALF legal funding model is to help plaintiff law firms maximize their business opportunities and increase cash flow with a timely infusion of capital that ultimately assists the firm and the firm’s clients.
Unlike banking and other debt models, law firm partners are not required to sign personal guarantees or have other restrictive requirements when acquiring a legal funding by ALF. The ALF model allows lawyers to acquire capital today based on their future pending docket of cases and not on their personal or firm’s balance sheet or credit scores. ALF secures future, contingent law firm fees and becomes an “Equity Like” partner waiting for future settlements to be repaid.
With the flexibility of terms offered, ALF rates are moderately higher than traditional bank lending rates, however the return on investment can be significant for plaintiff firms that allow for greater growth, cash flow and profits.
The ALF law firm funding model includes the below highlights:
• No Personal Guarantees by Firm Partners.
• No long term contracts, 6 month minimum fees due to ALF.
• No restriction on use of Proceeds by the firm.
• Minimal monthly maintenance fees paid by firm.
• No monthly interest on principal paid by the firm until cases settle
• No insurance required by firm partners.
• No Equity, Co-Counsel Fees or other dilution events to firm.
• Funding from $100,000 to $10,000,000 or more available to firm.
• Refinancing at lower rates as firm portfolio matures and risk decreases.
Banking & Debt Models:
Banking and other Debt or partner models certainly have their place and benefits, however they may be too restrictive and Pre-Historic in nature. They normally have many old school attributes including (i) personal guarantees (ii) debt to equity ratios reducing capital that can be funded (iii) defined or restrictive timelines (iv) personal or firm credit score requirements (v) large monthly interest payments and many other conditions that plaintiff law firm equity partners are intimately aware of restricting capital for growth and cash flow. The primary benefit of banking, SBA and other debt and personal guarantee models are normally the lower annual rates law firms pay in exchange for the pledging of the firm partner’s personal and business assets.
Co-Counsel & Other Dilution Models:
It’s interesting how few plaintiff lawyers calculate the real cost of co-counsel or partner agreements. Certainly if a lawyer needs the legal expertise of a co-counsel or new partner, the benefits can make the difference in a successful case outcome or practice. If however, the reason for acquiring a co-counsel or equity partner is simply due to cash flow issues, case expense, or other capital concerns, there are many new options available other than the Pre-Historic co-counsel and equity partner options. To calculate these actual interest costs or fees, take an assortment of your past co-counsel/partner ventures, total the costs funded by these entities, calculate the legal fees you fee split, and then factor in the timeline. You may be amazed at the actual cost of this capital that is often the most expensive capital you will ever acquire. If you need an iconic lawyer and partner to get a desired result, it’s most likely a good business decision. If it’s simply a financial need, you may want to explore today’s many legal funding options available to you.
Case Cost Models:
We like some of the new cost models available in the market place. Although restrictive due to your firms’ actual costs being post-funded, this model has some benefits. The primary benefits we see in this model are (i) the potential expensing of the interest or fees charged for this capital that can be recovered from clients if contained properly in your client retainer and (ii) the cost of capital is very competitive with banking and other debt models that include personal guarantees. The downside of case costs capital is that real growth capital in this type of model is usually restricted to the firms’ debt to equity ratios and/or the firm’s actual cash out on case costs that often is ultimately tied to the firm’s cash flow.
Things to keep your eyes open for:
As a finance company that funds law firms, we have seen many interesting type of agreements that plaintiff law firms have entered into. Below are a few things you may wish to consider in deciding how you will fund, provide cash flow, and grow your law firm before executing another Pre-Historic funding model.
• What are the personal or firm guarantees. What is at risk?
• Can I sustain my monthly cash flow obligations?
• Are repayment timelines realistic?
• What are the upfront and ongoing fees?
• How long must I pay all the interest and/or fees and are there any pre-payment penalties or minimum payment timelines?
• Have I “given up the farm” just for capital? Are there better legal or law firm funding models today for my situation?
• Does my lender “Get” my business and the legal industry or do I get a “deer in the headlights” look when talking to them?
• Do I get an actual lending value for my future legal fees or costs pledged or is it really just a firm and personal balance sheet lending calculation?
• Are my monthly rates simple or compounding?
• With all of today’s models available to fund my firm, do I have a plan to (i) expand (ii) address cash flow for all expenses (iii) transition to cheaper capital as my firm’s portfolio matures?
While ALF staff and executives certainly don’t have all the answers regarding legal and law firm funding, we do have fifteen years experience as legal funding industry pioneers, a proven track record as national, international and Fortune 500 founders and a strong desire to help plaintiff law firms level the playing field against often better funded defense firms. It’s also clear that there are many new non Pre-Historic law firm funding models and opportunities available today than ever before.