Law Line of Credit

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A law line of credit is a tool that legal professionals use to stabilize cash flow. It can be used as a source of working capital, to cover operating expenses, or to finance the cost of pursuing a law suit to its resolution.

A lawyer has to pay support staff.

Why Use a Law Line of Credit

The cost of running a litigation practice can be very expensive for a lawyer. In a situation where the lawyer is being paid on a contingency basis, the lawyer may not be paid anything for his or her time. The only way they can bill for their legal fees is if they win the case. Even though the lawyer will be quite particular about which cases they will decide to pursue, they are not guaranteed that they will be able to collect any fees. In that kind of situation, setting up a line of credit means they have the funds to keep the practice going until they can get paid.

Cost of Litigation

Until a litigation lawyer wins or settles a case, all the costs of putting on the lawsuit will be assumed by his or her office. These fees and expenses include:

  • Filing fees for court documents
  • Court reporter fees for depositions
  • Expert reports
  • Travel expenses
  • Private investigators
  • Support staff

If the lawyer doesn't have the financial resources to bear the cost of litigation themselves, they will have no choice but to refer a case to another attorney, no matter how promising it appeared.

Collateral for a Law Line of Credit

A line of credit is a specialized type of financing. A bank loan requires someone to put up some form of collateral to guarantee the loan. With this type of line of credit, there is not need for the lawyer to use his or her house as collateral, and the amount owing doesn't appear on the firm's balance sheet as a liability. Another difference between this type of line of credit and a traditional loan is that with a loan, regular payments (principal and interest) must be made within a month after the funds are advanced.

With a litigation case, it may well be months or years before the case is settled. Most law firms are involved in several cases at once, which increases the amount of expenses they are responsible for until the cases can be settled or tried.

How a Law Line of Credit is Calculated

For a lawyer, the amount of the line of credit they can access is determined by the quality of the cases they have pending. This is considered a future asset that the law firm can leverage by using it to guarantee a line of credit.

For some of these lines of credit, no payment is made until the case settles. At that point, the amount owing on the line of credit, including interest, is paid out of the settlement funds. In fact, some legal financing companies are prepared to offer a line of credit on a non-recourse basis, which means that no money is owed unless the lawyer either wins in court or settles the case.

Before signing up for this type of financing arrangement, it's important to make sure that you understand all the terms and conditions of the contract. The amount of interest charged on the line of credit may be higher than with other financing options in order to compensate for situations where the company provides financing and the case is not decided in the plaintiff's favor.

People may talk about lawyers practicing law, but it is a business. Having a good handle on cash flow issues is something needs to happen for the lawyer to be able to afford to keep the doors open to clients.

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