...And You Shall Not Receive

How electronic payment processing eliminates collections

There are two types of lawyers in the world: those who fear collections because of experience with them, and those who fear collections by reputation. Both of these types of lawyers are right to be afraid. Very afraid.

No one wants to collect money from clients, which is one of the reasons why lawyers so aggressively collect retainers instead: to make sure they get paid as much as they possibly can, upfront—in case nothing more comes in. The fact that lawyers do this, thus willingly engaging arcane trust accounting rules, shows just how valuable collecting in advance for work to be performed really is.

The business purpose, then, for collecting retainers (and therefore avoiding accounts receivable) is valid —avoiding collections actions reduces (in many cases) invalid ethics complaints against attorneys, unnecessary administrative or court involvement and the awkwardness surrounding a lawyer’s testifying against his client, potentially respecting confidential information. In terms of business processes, too, reducing accounts receivable is the right play. Collecting fewer fees means fewer invoices are sent.

Inefficient law firms, which are most law firms, are bound to miss some (or many) billing cycles—thereby losing income simply by forgetting, or neglecting, to turn on and manage a procedure. Even for those law firms who do send bills, that doesn’t guarantee payment. And, when an invoice is once unpaid, follow-up is not guaranteed—oftentimes, unpaid invoices are sucked into a black hole of mismanagement. Law firms that can bill flat fees, collect contingent fees, or get paid by reliable vendors have it easy. Firms billing by the hour or relying on value billing propositions that depend, in part, on work in progress, have to face up to the difficulty of getting their clients to pay them, over and over again.

While retainers solve a potentially significant portion of that problem (especially evergreen retainers—retainers that clients replenish to agreed-upon levels at regular intervals), there remains an issue. Even as the focus in the legal industry is trained on lawyers’ cash flow, the larger problem here is the client’s cashflow. The fact of the matter is that individual clients and small business owners are hard-pressed to pay lawyers’ requested retainer amounts, in an environment where wages have stagnated for decades and in which the national economy continues to stall.

In fact, it’s a fair question to ask as to whether lawyers themselves could easily pay the retainers they’re asking for from their clients. If you’re asking your average law firm client to cut you a bank check for $5,000 for your retainer, consider how reasonable that request is. How many of your clients actually have those funds available, if the majority of Americans are living paycheck-to-paycheck? Cash on the barrelhead is a nifty idea; but, it’s a concept that often falls flat in the real world.

What this all means is that the way lawyers have traditionally asked their clients for advanced funds is broken; and, the problem is exacerbated as budgets across the country continue to tighten. In a perfect world, the lawyer receives a lump sum, and does not engage the client over payment plans. Electronic payment processing makes this possible.

For lawyers who accept electronic payments, the place of the law firm as payment plan manager is taken over by the client’s bank or credit card vendor. The lawyer is paid; the bank extends the funds or the credit card company extends credit; the client pays the money back per terms established with its bank or lender. When law firms allow clients to pay via credit card, law firms allow clients the ability to create a payment plan in which the law firm is not involved. That solves headaches like Excedrin. Clients using electronic payment methods have access to more funds than they would typically be able to acquire via their bank accounts, which means law firms can effectively charge larger retainers; and, collection (at least on those retainers) is practically instantaneous.

Law firms that do not engage electronic payment processing often understand these advantages, but don’t access the option based on some common concerns—like where payment processing fees are drawn from—these can be drawn from operating accounts, rather than trust accounts, meaning that client funds are not impermissibly used to cover such costs. Or, like when chargebacks create havoc against trust account reconciliations—so, place a hold on received funds that covers the chargeback period. Or, even like how payment processing fees are not a valid expense when client checks remain an option—then keep accepting those checks, while your potential clients flock to law firms offering modern payment options. Electronic payment processing fees are a cost of doing of business that should not be passed on to clients. Raise your fees to cover for them if you feel so strongly about it.

Now that you’re out of excuses, it’s high time you adopted electronic payment processing, reduced your collections, and increased your revenue.

About the Author

Jared D. Correia, Esq. is the CEO of Red Cave Law Firm Consulting, which offers subscription-based law firm business management consulting and technology services for solo and small law firms. Red Cave also works with legal institutions and legal-facing corporations to develop programming and content. A former practicing attorney, Jared has been advising lawyers and law firms for over a decade. He is a regular presenter at local, regional and national events, including ABA TECHSHOW. He regularly contributes to legal publications, including his column, ‘Managing,’ for Attorney at Work. Jared is the author of the American Bar Association publication ‘Twitter in One Hour for Lawyers.’ He is the host of the Legal Toolkit podcast on Legal Talk Network. Jared also teaches for Concord Law School, Suffolk University Law School and Solo Practice University. He loves James Taylor, but respects Ron Swanson; and, he tries to sneak Rolos when no one is looking.