How Software Financing Helps Law Firms Stay Ahead

To benefit from the latest software, law firms are challenged to find a strategy to harness the power of technology, while also managing the costs of projects to ensure they don’t interfere with partner distributions and growth initiatives.

Enter software financing.

HOW DOES SOFTWARE FINANCING WORK?

According to a survey published by the International Legal Technology Association (ILTA), nearly half of all law firms spend between $8,000 and $21,000 per attorney on technology resources. A growing cost of technology is tied to software expenses, which can easily reach six and even seven figures. Implementations often involve huge upfront consulting fees, training requirements and ongoing expenditures.

Financing allows firms to spread the cost of software over the useful life of its application, which, in turn, preserves money for strategic growth initiatives and partner distribution.

Software may seem like an odd thing to finance — it lacks the tangibility of physical equipment and many banks are reluctant to finance “soft” costs such as a software upgrade project. However, with the cost of these projects skyrocketing, financing is becoming increasingly common in the legal industry, as well as in the wider business world. The right lender will be prepared to finance the entirety of a software system or upgrade project, including hardware, software, maintenance costs, consulting fees and other implementation services.

Financing allows firms to spread the cost of software over the useful life of its application, which, in turn, preserves money for strategic growth initiatives and partner distribution.

Software leases typically take one of two forms. Law firm executives should choose the lease structure that best aligns with their objectives:

• Capital leases: Software is booked as an asset, subject to depreciation as if the law firm paid cash. Monthly capital lease payments are fixed and spread out over the lease term. At the end of the lease, firms will have the right to use the software with no further financial obligation. (Although considering the speed of software development, it may be time for another update.)
• Tax leases: Lease payments are treated as business expenses, which can be written off for taxes. Tax lease payments tend to be lower than capital lease payments, as they do not lead to outright ownership. At the end of a tax lease, firms typically can elect to either purchase the right of use of the software or continue leasing.

THE BENEFITS OF SOFTWARE FINANCING

The overall advantage of software financing is that it allows firms to take control of unwieldy, often unplanned expenses. The result is increased flexibility to take on other, more profitable ventures. Software financing lets firms:

• Spread payments over time. A lease structure better aligns use with cost. Similar to office space or equipment, legal professionals generate value from continual use of the software; therefore, it makes sense to spread out the costs over its useful life.
• Ensure there is cash on hand. A strong cash position can protect against unpredictable markets and allow the firm to be poised for growth opportunities.
• Grow faster and do more. A firm’s momentum doesn’t have to come to a halt to implement more efficient software or upgrade legacy systems. Software licenses, hardware upgrades and training can all be integrated into one simple lease.
• Minimize bank credit exposure while paying low fixed rates for their software.
• Maximize partner distributions and keep within budget with predictable payments.

SOFTWARE POWERS LAW FIRMS

Given the high costs involved and the complexity of implementation and updates, firms may be inclined to think of software as a necessary annoyance. But anyone who remembers the era before software saturated the profession will recognize how digital tools have revolutionized legal work. We can share information faster, store and find records with ease, and keep track of time and accounts with greater precision.

In short, software investments are strategic, and they help law firms make the most of their human resources. Financing is a way for firms to realize the full potential of their software without sacrificing growth or partner distributions.