WORKING CAPITAL

South African attorney firms litigating personal injury matters on a contingency-fee basis have the opportunity to earn significant profits. According to our research, the return on investment for litigating road accident claims can be in excess of 60% per annum, around four times the average return of the JSE.

However, these firms also face several challenges. Prior to litigation, attorneys need to pay out of their own pocket for medico-legal disbursements. Add to this the protracted cashflow cycle of litigation due to the nature of court process and the Road Accident Fund, which causes firms’ funds to be locked up in matters for months, and even years.

The result of all this is that determined partners wanting to grow their firms need access to significant working-capital and a financial partner that understands the intricacies of running a legal practice.

CURRENT MEDICO-LEGAL LANDSCAPE

Medico-legal providers such as medical specialists and actuaries are reluctant to work on a contingency or even a deferred basis. Where they do, their prices are then highly inflated to adjust for the costs and risks involved in waiting for payment.

With nobody else in the litigation ecosystem available, the attorneys are ultimately the ones who need to carry the funding requirements. But while the demand for working-capital in law firms can be large, this is often not matched by an equivalent supply of appropriate capital.

TRADITIONAL LENDERS

Traditional lenders such as South African banks typically have a low tolerance for risk and do not fully appreciate the unique nature of law firm financing. The first thing banks typically require is tangible assets as security against any loan. This may include cash-on-hand, property, equipment and the accumulated assets of the individual equity partners. While asset-backed lending works well for industrial businesses with large capital bases, it’s more problematic for businesses in the professional services which trade in the knowledge economy. For example, traditional lenders would usually not recognise value in many of the law firms’ most valuable assets such as its client base, contingent / differed fees, book debts, mandate and fee agreements, invoices, court orders and taxed bills of cost.

Secondly, banks look to lend to businesses with consistent cash flow patterns. They view the typical up-and-down cycle of a legal firm income with a jaundiced eye. As a result, many law firms, including large and established practices, may only qualify for a small amount of the required funds.