Business analysts report that poor management is a principal reason for business failure, while managing cashflow is critical and one of the most frequent stumbling blocks. One of the major challenges the legal sector faces, with which all practitioners will be overwhelmingly familiar, is that often, despite cases being concluded and settled, on many occasions these fail to generate income for a significant period of time.

Law firms are businesses and a successful business needs the cashflow to invest to drive forward. Historically, law firms have turned to banks and other traditional sources of funding to bridge the cash outflow/cash inflow gap. However, this facility comes at a cost and has many limitations.

The lending decisions of banks are based primarily on the law firm’s covenant and the value of the individual partners’ personal assets within the firm. Banks do not always understand or recognise the value of work in progress as collateral and they will generally not issue law firms with loans based solely on the value of their pending case inventory. Compounding the frustration, the economic downturn has led to a number of major lenders either closing their doors or quietly reducing their willingness to extend existing facilities – further squeezing the availability of funding to the legal profession.

A major hurdle for law firms is proving repayment timescales and, when considering working capital facilities, banks will look at a company’s expected cashflow. Owing to law firms business cycles, a delay of several months can often be experienced prior to fees being generated and/or received. It is therefore very difficult for banks, and indeed the law firms themselves, to put a definitive timescale on repayments. This leads to banks becoming extremely conservative in their lending and only providing modest facilities.

With banks only willing to lend a limited amount and these loans frequently being tied into expensive insurance products, law firms are facing an increasingly difficult challenge. Bank loans are often inadequate sources to support firm’s objectives, meaning they need supplementing with other sources of capital. In practice, this often entails partners contributing their own personal finances and further shouldering the financial burden.

A brief examination of the prevailing funding methods raises the question ‘why has the industry not moved with the times?’ Lawyers are certainly not unworldly, but they appear hesitant or simply too busy to look for alternative funding methods. A funding alternative is one option, but a quantum leap is needed.

Having been involved in the legal industry and experienced the changing funding issues facing the legal sector, it was a pleasant surprise to be introduced to an innovative option that provides the majority of the anticipated costs within a short period of time, and does not involve a lengthy application process, scrutiny of the law firm’s accounting, financial and/or personal information. Furthermore, it does not compromise bank or existing finance facilities as it is essentially self-financing.

So what is the solution? Costs in advance CIA schemes, designed to act as an additional and supplementary service to the other funding methods, are already being successfully implemented and utilised.

Such CIA schemes enable the early realisation of solicitors’ costs and help avoid unnecessarily low settlement agreements being entered into in the interest of speeding up payment. When a bill is drawn up by costs draftsmen, a CIA provider will usually advance a large percentage of the value of the bill within 24 hours to the law firm. This allows solicitors to maintain a healthy financial position, rather than constantly playing ‘catch up’ with the potential axe of a personal guarantee hanging over them.

While some funding providers currently offer forms of disbursement funding that allow for prepayments to be advanced, of key importance to many partners is that they also require the guarantee of their personal assets, wherein lies the crucial differentiating factor.

SHF Legal Funding Ltd is a new firm that specialises in the provision of cash advances to firms of solicitors purely on the basis of the settled litigation claim for which the costs have been assessed by the costs draftsmen, and/or agreed by the judge/court but still remain outstanding.

The ambition is to provide law firms with a new alternative funding model that will revolutionise litigation funding and bring an end to the era in which law firms are handicapped by poor cashflows, the need for security and personal guarantees, and their dependence on the traditional and increasingly scarce bank funding models.

Andrew Thomas of Civil & Commercial Costs Lawyers, a provider of costs litigation services, told me: ‘These are uneasy times for the legal profession both in terms of the economic climate and proposed changes to regulations; the profession will need to be careful, both in terms of maximising their inter-parties costs recoveries and releasing cash. In my view, a schemes which offer solicitors the ability to release cash funds against unquantified costs orders, without the need for applications to the court or rigorous paperwork with lenders, will change the landscape of the legal funding industry.’

The demand resonating from the legal industry is clear; what is needed is a simple, quick and effective funding mechanism that enables law firms to seek new business without the handicap of chasing cashflow while negotiating over historic costs incurred.

Will CIA schemes be the solution to law firms’ financial woes? Time will tell.

Damien Welch is director of SHF Legal Funding Ltd