Hersch, Anthony --- "Disbursement funding: the benefits for SME law firms" [2017] PrecedentAULA 25; (2017) 139 Precedent 46

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DISBURSEMENT FUNDING

THE BENEFITS FOR SME LAW FIRMS

By Anthony Hersch

Disbursement funding is a well-established and powerful financial solution that has been widely adopted in the UK and US, and is gaining momentum in Australia. It is designed to support sole practitioners and small-to-medium-sized (SME) law firms by releasing capital constraints, which enables the firm to take on additional cases and generate more revenue.

WHAT IS DISBURSEMENT FUNDING?

Disbursement funding is the provision of finance for third-party costs (disbursements) that form part of any litigation. This includes the funding of medico-legal reports, radiology reports, court appearance and filing fees, barrister fees and all other expert reports/expert witness fees.

Disbursement funding is designed to assist SME law firms, personal injury law firms, commercial litigation firms, family law firms, and other firms seeking growth without cash flow implications. The reason this financial product is powerful is because it typically allows the law firm to defer payment of third-party costs (disbursements) until settlement.

WHY DISBURSEMENT FUNDING IS RELEVANT FOR SMALL BUSINESS

There are typically two main areas of consideration for SME law firms:

(1) Managing cash flow: For all small businesses, managing cash flow is crucial and is often the critical measure that influences a SME law firm’s capacity/ability to generate revenue and in turn growth. Typically, third-party costs 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, and so forth.

Disbursement funding directly addresses these requirements by alleviating working capital and facilitating growth by significantly increasing a firm’s ability to take on more cases.

Its immediate advantages can be summarised as follows:

(1) Keeps cases moving: Disbursement funding enables cases to progress without being obstructed by the need to finance third-party costs upfront. In some cases, this may equate to a few thousand dollars. In others, it could represent tens of thousands of dollars. This benefits solicitors in two primary ways: it enables cases to continue to progress and strengthens cases through access to fully funded independent expert reports.

(2) Generates revenue: Disbursement funding can play a vital role in boosting the firm’s operations, sustainability and future earning potential. This can be achieved by taking on additional cases, which in turn can positively affect revenue.

(3) Provides a point of difference/ new business generator: Disbursement funding provides a direct competitive advantage to attract new clients and expand the business.

(4) Helps facilitate duty of care: Disbursement funding allows solicitors to care for their clients’ interests by enabling access to specialists that otherwise may have been cost-prohibitive if claimants had to finance them upfront.

THE MANY TERMS FOR DISBURSEMENT FUNDING

A core reason why disbursement funding is currently underutilised in Australia is the array of terms used to describe it. The most common term used to search for disbursement funding is litigation funding. Other terms used include: outlays funding solutions, claims funding, legal funding, legal financing, third-party funding, litigation loans, litigation funding solutions, loan-based funding or disbursement loans.

By way of clarification, litigation funding is where a third-party funder provides the financial resources to enable sizeable shareholder class actions or corporate litigations to commence. Most often, covering disbursements will be included as a component of a litigation funding process. By comparison, disbursement funding is a stand-alone funding solution that is geared to support SME law firms.

HOW IT WORKS

Each provider will have its own way of processing disbursement funding. Understanding the terms, turnaround, claimant involvement and financial structure of the funding upfront are all critical. To ensure that you are selecting the most appropriate provider for your requirements, we recommend that you ask the disbursement funder the following questions:

• What are the terms of trade?

• Are there loan contracts?

• Does the claimant need to be involved?

• Are any personal guarantees required?

• What is the repayment term for the deferred payment option?

• Are funding costs known and set upfront (or calculated based on interest leading up to settlement)?

• Are there any associated fees (such as annual fees, account keeping fees or drawdown fees)?

• Are there any penalties for extension beyond the initial term?

• What is the turnaround time for funding invoicing?

• How long has the funder been in operation?

• What compliance protocols does the funder have in place?

Top five tips for using disbursement funding in 2017

To give the above further context, below please find our top five tips for using disbursement funding to achieve growth without cash flow implications:

(1) B2B vs B2C funding: Consider benefits of a business to business (B2B) versus a business to client (B2C) disbursement funding product in relation to client conversion rates. B2B funding enables lawyers to retain their client relationships with no onerous loan documentation, which is 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 is required (this is largely determined by whether the funder is B2B or B2C). Using 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 (it 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 the question about 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 upfront is the simplest option. The alternative is a moving target and involves complex calculations of the financing component leading up to settlement.

THE NET BENEFIT

The net benefit of disbursement funding for SME law firms is significant. It removes any cash flow impediments to fund disbursements, enables cases to move forward more quickly and, importantly, increases the opportunity to take on more cases. In summary, it provides more cash flow flexibility and facilitates growth.

Anthony Hersch is the General Manager of JustKapital Disbursement Funding. PHONE [phone] EMAIL [e-mail] WEBSITE justkapital.com.au/disbursement-funding .