Lawyers as Bankers: Extending Credit to Clients

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You might not have believed it when you were in law school studying torts and statutes of limitations, but as a lawyer, you are destined to be a banker.

Collecting cash up front

Obviously, the best method of doing business is collecting cash up front, or payment in advance of doing the work. However, this is seldom accomplished. Clients may be accustomed to making a deposit against future services, yet the lawyer's billing in the first month will normally exceed the retainer, no matter how large the retainer.

And a large retainer is seldom possible. Our commercial society is just not built that way. Insistence on full payment or large retainers in advance of performing services would result in substantially less work.

Extending credit to clients

Most clients do pay their bills in full, especially when we employ optimal collection techniques, and they feel insulted when they are not trusted to fulfill their payment obligations. Therefore, as lawyers, we extend credit to our clients.

In order to get paid on a regular basis, lawyers need to take a more businesslike approach to extending credit. One survey concluded that it takes an average of 121.9 days for a law firm to collect on a bill. Fortune 500 companies do it in an average of 39.6 days.

One way to collect in a timely fashion is to make the process of extending credit public to both the client and lawyer. A public and obvious extension of credit involves a credit application that the client has to fill out. If the client balks, that's a first-rate clue as to the client's intention of paying you — or not paying you.

Clients have to fill out credit applications to get supplies from vendors, to get credit from the bank, and even to get services from health care providers. Why shouldn't they fill out such applications for you?

You can always tell them that you are perfectly happy to accept cash — up front, of course. Short of that, because you are extending credit just like doctors and other professionals, the credit information they provide to other professionals must also be given to you.

"One survey concluded that it takes an average of 121.9 days for a law firm to collect on a bill. Fortune 500 companies do it in an average of 39.6 days."

Crafting a credit application

In reality, good customers will see your credit policy and the credit application in a positive light. For one thing, you have brought the process out into the open, where it becomes obvious that you know and the client knows that your law firm is extending credit from the first minute that you begin work on a case. Your clients will value creating a relationship with a firm that is committed to sound business practices.

A credit application does not need to have many more questions than the average new client intake form. You want to know three types of information: general, financial and reference.

To start, you will need the exact legal name of the client company and its street address, city, state and zip code. You will also need full legal names and titles of those who own the company if it is a proprietorship or partnership. Get Social Security numbers and contact names, too.

Financial information includes trade references and banking information. You'll want to ask some other information, such as the age of the company, the company's state of incorporation, names of company officers, names of owners, why the client left the last law firm, and how much work the client will have for your firm.

At the bottom of the credit application, you should have a sentence or two to this effect: "Applicant's signature attests financial responsibility, ability and willingness to pay our invoices in accordance with the following terms." Then be sure to explain your terms.

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