Driving innovation: How legal finance is shaping the future of law firms

The year 2025 is likely to present law firms with challenges as well as opportunities. To meet evolving client expectations, ensure sustainable growth and stay competitive, firms must rethink their strategies, starting with how they finance their operations. Financial innovation is no longer optional for law firms--it's essential.

Historically, innovation in legal services meant adopting new technologies or optimizing workflows. But as the legal industry has evolved, innovation in how matters are funded has become equally critical. Clients are seeking to spend less and gain more. By embracing legal finance, forward-thinking firms are better able to grow by serving clients without the traditional boundaries and constraints of the billable hour.

Breaking down barriers between defense and plaintiff practices

Traditionally, law firms have focused exclusively on either defense or plaintiff practices. This divide is affirmatively dissolving as firms use legal finance to adapt to client needs. Defense-oriented firms in particular are increasingly leveraging legal finance to take on higher-value cases and build robust plaintiff practices. In a recent survey, a leading AmLaw 100 partner acknowledged, "[The perception of legal finance] has become much more positive, and larger firms on the defense side are more interested in it, with many using it."

By embracing portfolio financing or capital facilities, firms can take on more contingency cases and diversify revenue streams without compromising their ability to compensate partners and associates during what almost inevitably becomes protracted litigation. This shift also positions firms as true partners to their clients, as they stand together on both sides of the "v" by offering innovative financing options that support favorable outcomes.

Generating cash flow without debt

Traditional funding sources such as partner capital and lines of credit can limit a law firm's ability to grow and place undue financial burdens on partners. Rising costs in areas like compensation, office space and technology create further strain.

Legal finance provides an alternative to firms through capital facilities tied to multiple matters in a portfolio. Portfolio financing, which funds multiple cases brought by a firm rather than a single case, helps firms reduce financial risk and access larger sums of capital. This capital can be used for litigation-related expenses and also for broader operational needs, including payroll, technology upgrades and marketing initiatives.

This approach allows law firms to operate more like corporations, leveraging diverse capital sources and freeing themselves from traditional funding constraints. As one Global 200 law firm partner explained, "Legal finance has evolved from funding individual cases to supporting broader firm growth. Boutique firms, in particular, are using it to thrive."

Offering clients flexible fee arrangements

Clients increasingly expect law firms to provide alternatives to traditional hourly billing. Over half of law firms anticipate that pre-negotiated, discount-related revenue will rise by 2026.

Legal finance empowers firms to offer creative fee structures, including contingency and alternative fee arrangements. This not only attracts new clients but also strengthens relationships with existing ones. For emerging partners, legal finance also facilitates internal buy-in for pursuing high-potential cases, giving them a competitive edge.

A litigation boutique partner noted, "Clients prefer funders to assume the risk, making legal finance indispensable to the practice of litigation."

Streamlining collections

Delayed payments from clients can create significant financial challenges for law firms, especially those with large hourly practices. Legal finance offers a solution by purchasing outstanding receivables, including billed and unbilled time. This converts potential future revenue into immediate cash, providing firms with liquidity for operational expenses, partner distributions or growth initiatives.

This funding model eliminates repayment obligations if a client defaults. It also allows firms to focus on their cases rather than financial pressures.

Conclusion

As law firm lawyers have become increasingly aware of legal finance and understood that its use does not alter lawyer-client relationships or impact control, use has exploded. With recent research showing that 82% of law firm lawyers report the use of legal finance--a ninefold increase since 2012--its adoption is reshaping how firms manage operations, expand practices and attract clients.

By leveraging legal finance, law firms can address rising costs, improve cash flow and meet the demands of an increasingly competitive market. Firms that embrace this approach will be best positioned to innovate, compete and thrive in the years ahead.