Legal Disbursement debt or self-funding can distort a law firm’s financial profile and reduce its borrowing capacity. Providior’s specialist funding solution helps isolate this debt, enabling more productive bank financing conversations.
The Value of Non-Bank Specialist Funders
It was over coffee the other day that the Managing Director of one of our successful law firm clients made an interesting point on the value of non-bank specialist financiers in the context of a firm’s overall banking and financing arrangements.
“We couldn’t have a productive and positive financing conversation with our bank if we didn’t have Providior holding the disbursement debt. The banks wouldn’t be able to understand our financials and would probably deem it to be too high risk. The mainstream financing that we require for our M&A and partner equity exchanges would be detrimentally impacted by the presence of self-funded disbursements.”
Having come from a Big 4 Bank where he specialised in lending to professional services businesses to fund M&A activity, property acquisition, partner equity exchanges and working capital, our General Manager – Commercial, Adam Platt-Hepworth, could see that what our client was saying here was spot-on.
The Cashflow Challenges in Personal Injury Practice
Personal Injury practices operating on the typical no win no fee basis are obliged to carry the outlays on these files such as medical expert reports, filing fees and other costs. These outlays are later subtracted from the settlement in the event of a successful outcome, but this can take anywhere from 12-36 months for most matter types. Banks typically find this a challenging concept to comprehend and factor into their assessment frameworks.
How Self-funded Disbursements Can Impact Bank Applications
Banks are concerned with the servicing of all and any debt by prospective borrowers. If the firm was using a fully drawn working capital or term debt facility, then repayments of principle and servicing of interest would need to be taken into account in the bank’s serviceability calculations. Given that (according to Providior’s own analysis of our loan book) on average, one PI practitioner will require $200-$350k in disbursement funding, a small to mid-size mixed practice firm with four PI practitioners might be carrying $1.4m in disbursements.
Professional Services teams with the banks will generally lend to a law firm based on a set of metrics that dictate the bank’s maximum comfort with leverage against the firm. Without using a purpose-built disbursement funding facility, the debt would need to be subtracted from that leverage calculation, dramatically diminishing the firm’s borrowing capacity.
The Benefits of a Purpose-built Disbursement Funder
By having the disbursements on the firm’s personal injury matters funded by a specialist funder with all servicing of the debt (principle and interest) deferred until settlement, the elephant in the room for all firms with a PI practice, is somewhat neutralised as it is then neatly packaged.
There is still the challenge for banks in getting comfortable with the somewhat speculative nature of personal injury practice. Certain credible statistics can be used to improve a prospective financier’s perception of the firm’s ongoing sustainability, such as:
- Win/loss rate
- Time-to-settlement by matter type
- Information on the firm’s file selection criteria
Providior’s Role in Broader Financing Discussions
This is where Providior can offer a really high-impact solution. We are well versed in co-operating with banks and working through the technicalities of security structures to enable bank facilities to be implemented alongside the disbursement facility from Providior. At the assessment stage, we are happy to work through educating bankers on how our solution works and the practical implications on the firm’s cash flow.
Providior – Funding Business Growth
We recognise that Providior is just one of many financial tools available to growing firms. We fund business growth through our simple and high-impact solutions, and we make other growth funding possible. Discover 5 things your law firm could do with unlocked cash when you work with Providior.
Let’s Talk
If this topic resonates with you, get in touch and let’s see how Providior can manage your firm’s disbursement burden through our funding solutions.
The information contained in this article is provided for general informational purposes only and does not constitute financial, legal, or professional advice. While examples and figures are based on Providior’s experience and analysis, they are illustrative and should not be relied upon for decision-making. Each firm’s circumstances are unique, and readers should seek independent advice from qualified professionals before making any financing or business decisions. Providior does not guarantee any specific outcome or approval from financial institutions. All financing arrangements must comply with applicable laws and regulations.