Accounts Receivable Finance for Law Firms
The law firm cash cycle is long, with 90 – 100 days being standard. Given the cash-based accounting status of law firms, this cycle length becomes more noticeable as year-end approaches. Most partners prefer to counsel their clients rather than argue with them over billables, let alone chase clients on issued bills. The organizationally detached nature of collections and the need to maintain excellent relationships with clients results in high non-cash current assets sitting idle on law firms’ balance sheets. Accounts Receivable Finance can address these issues.
Accounts Receivable Finance from Woodsford
Law firms appear to have a straightforward business model. Lawyers spend time on client matters which generate fees, and the firm then bills clients for these fees and, subsequently, then nudge the clients to pay their bills. But any CFO of a national or international law firm will tell you that working capital management is increasingly challenging, particularly given the current economic cycle.
The legal industry has undergone significant transformation driven both by clients’ desires for alternative pricing and billing models and by internal pressure to take on work which does not fit the traditional billing model. These changes are increasing working capital requirements while firms still must wait for payment: litigation practices are performing more contingent or deferred fee work and waiting for cash proceeds to arrive; transactional departments are increasingly postponing a proportion of fees until the successful completion of the transaction (such as a client’s successful debt or equity raise); insolvency groups often wait months for the court to approve their bills. On top of these billing challenges, CFOs in acquisitive or high growth firms have even more complex problems as they consider how to bolt-on acquisitions or finance new office openings.
Finally, there is the key question: how to generate profit? Law firms utilize cash-basis accounting and only recognize revenue when cash is collected and can only distribute cash profits to partners.
These developments reflect the changing nature of the law firm environment and put pressure on the CFO’s ability to manage cash-flow and profits while keeping clients and partners happy, especially at year end.
How can Woodsford help?
Our Accounts Receivable Finance allows conversion of billed work into cash and revenue at a highly competitive rate, greatly improving working capital at pinch-points or facilitating one-off transactions, such as expansion into a new city or lateral acquisitions.How can Woodsford help?
How does Woodsford’s Accounts Receivable Finance work?
Woodsford purchases quality receivables due from the firm’s clients on a non-recourse basis. If the receivable is never collected, Woodsford’s money will not have to be repaid. We have a straightforward diligence process where we assess the quality of the firm’s billings and price the transaction. The firm remains in control of their accounts receivable function and collects receipts in the normal way, but under less pressure to provide steep discounts to get cash in the door sooner. The whole transaction can be completed in 3 weeks with repeat transactions closed within a week. The product is also structured to work alongside firms’ existing banking relationships.
Why Accounts Receivable Funding?
Law firm invoices are a key asset which can be easily monetized with Woodsford’s help; services have been rendered, clients have been billed, and it should only be a matter of time before these bills are transformed into cash. Woodsford can step in to accelerate the time to cash collection by purchasing these receivables.
Who does Woodsford work with?
Our Accounts Receivable Finance is designed for law firms with more than 50 partners and full legal service offerings.
The benefits of Accounts Receivable Finance
• Accelerates collectables, relieving cash pinches.
• Accelerates revenue generation to allow enhanced partner distributions.
• No impact on the firm’s accounts receivable department with clients unaware their invoices have been financed.
• Relieves pressure to provide large discounts for early payment of bills.
• Straightforward and fast diligence process.
• Works alongside existing banking facilities.
A well-regarded AMLAW 350 firm approached us after engaging with Woodsford on a litigation finance transaction. The firm had worked with Woodsford successfully on a number of matters and they recognised that we are a sophisticated, flexible and deep-pocketed source of finance to the legal industry. Outside of their clients’ need for funding in specific disputes, the firm themselves had certain crunch points during the year when they needed to make significant cash outlays. While they had significant billed but unpaid time, they wanted to avoid offering deep discounts or jeopardizing key client relationships while chasing payment.
The firm had unpaid invoices from blue-chip clients including a number of invoices tied-up in court approval processes. We received a detailed list of the receivables that were to be financed and within 3 weeks the necessary diligence was conducted by Woodsford and $5M of non-recourse finance was provided at a competitive discount rate.
Why work with Woodsford?
Woodsford has over a decade of experience of financing law firms and their clients. Our unique blend of financial and legal expertise combined with significant capital to deploy enables us to efficiently evaluate investment opportunities and deploy cash quickly.
Outsiders may be perplexed as to why law firms have any trouble generating cash. After all, hourly rates of even typical firms seem substantial, while investment in expensive fixed assets is limited and all substantial firms will have a list of blue chip companies as clients. The reality is that the cash cycle is very long. There are few trade creditors who can be stretched as attorneys need paying every month, while the billing cycle is slow. Most partners much prefer to counsel their clients than argue with them over what is billable from WIP, let alone chase them for payment. The decentralised nature of collections and the need to maintain excellent relationships with clients coupled with a reluctance to offer discounts for early settlements (and therefore devalue the perception of a premium service) all results in significant non-cash current assets sitting idle on law firms’ balance sheets.
About the author
Mark Spiteri is Woodsford’s Finance & Commercial Director. He is an economics graduate from the London School of Economics and started his career in 1997 at Coopers & Lybrand (now PricewaterhouseCoopers), where he trained as a management consultant and was admitted into the Chartered Institute of Management Accountants (CIMA), latterly joining PWC Corporate Finance.
He joined the Woodsford Group in 2005 where he was responsible for financial services and real estate investments. Since joining Woodsford Litigation Funding, Mark has taken the commercial lead in negotiating funding terms for dozens of cases and law firm facilities both in the US, Europe and Australia as well as providing valuable input into settlement discussions in support of claimants.
Mark is known in the legal finance market for both his creativity and commercial acumen and for demonstrating flexibility to find the right solution for both law firms and claimants to ensure an alignment of interest between the parties. Mark is responsible for the global finance and commercial function splitting his time equally between serving North American, EMEA and APAC clients.
For further information, or to discuss a matter for funding, contact Mark directly.