As the Small Business Administration recognizes, cash flow is the lifeblood of a business and critical to its growth. Yet ethics regulations requiring lawyers to deposit advance payments into trust accounts and subsequently release it in dribs and drabs as work is performed only serve to exacerbate cash flow issues for solos and smalls at a time when many are struggling to stay afloat or compete with online providers who aren’t subject to the same restrictions.
By way of background, lawyers in every jurisdiction must maintain a client trust account to hold client funds and property. In most jurisdictions, an advance retainer (i.e., money paid up front by a client for services) is considered client property until the lawyer actually performs the work. For that reason, the money must be deposited into the trust account. The only time that jurisdictions depart from this rule is for flat fee payments which some states treat as earned on receipt — which means that they can be spent right away instead of squirreled away in trust.
The distinction between earned on performance and earned on receipt is one of timing – and when it comes to small businesses and cash flow, timing is everything. In fact, in the real small business world, (as opposed to the make-believe La-La — er, Lawyer) Land), payment timing is so critical that payment processors are competing to develop solutions that will guarantee that sellers receive funding the second that a credit card payment is processed.
Timing of payment doesn’t just matter for staying afloat, but also for future growth. Consider an attorney with a state-wide appellate law practice who offers low cost flat-fee appeals and through aggressive marketing and persistent networking, signs up ten $5000 appeals in his second month of business. If the money were treated as earned on receipt, the attorney would have $50,000 cash on hand to hire one or two freelance attorneys to start work on the briefs. By bringing on additional help, the attorney would be freed up to continue marketing for more cases to generate even more revenue. By contrast, if the attorney is required to put the money into the trust account, she might not have the ability to hire help and would be left with the task of drafting ten briefs in the course of a month or worse, having to turn the work down. And even when the briefing is completed, the lawyer would only release a portion of the payments, not the entire fee.
Lots of lawyers complain about their inability to grow their practices without the ability to seek outside investment. That’s a big push and unlikely to succeed for at least a decade or more because that’s the pace at which the legal profession grinds. By contrast, tweaking ethics rules to treat payments as earned on receipt would be far easier with similar benefits.
Unfortunately, there are too many stakeholders with a vested interest in maintaining lawyer trust accounts to hope for change soon. Legal aid organizations are funded through IOLTA and payment processing platforms designed for the sole purpose of enabling lawyers to split credit card payments between their operating account and trust accounts would have to compete with companies like Paypal and Stripe that quite frankly, could eat these other services for lunch. Still for lawyers genuinely interested in making solo and small firm practice more sustainable and innovative, three little words – earned on receipt – could make all of the difference.