Early Payment Discounts for Law Firms

So, the good news for the law firm of Andrew Abramowitz, PLLC is that business has increased steadily over the past few years. The bad news is that there has been somewhat of a greater tendency among clients to be slow in paying invoices. There is a hassle factor associated with this, as it requires frequent follow-up, but the real issue, as anyone who runs a small business will know, is that lumpy income creates financial challenges. My firm has regular expenses that can’t be contingent on the timing of my clients’ payments, and the owner of the firm (yours truly) has personal expenses that are equally not capable of being deferred while I wait for payment. (All of this sounds very self-pitying, but I’ll get to the point soon. I’ve been very fortunate in life and cannot complain.)

There are financial solutions to lumpy income for small businesses, including maintaining significant cash reserves on hand or accessing business lines of credit, invoice factoring arrangements, etc. But these are expensive measures. Another approach is to create economic incentives for clients to pay quickly, which would mitigate the problem. An example of a negative incentive would be for a firm to impose relatively high interest charges on unpaid, late balances. I’ve seen law firm engagement letters that at least permit such charges, though I don’t know how often they are actually imposed. My sense is that, even if they are effective, the approach would sour the attorney-client relationship.

The flip side of that method would be to offer discounts to clients who pay quickly. I’ve done exactly that, with a new policy that I introduced for my clients that pay hourly rates, where any invoice that is paid within 15 days of being rendered is discounted by 5%. I did this in conjunction with an across-the-board increase of 10% of the hourly rates, so the discount has the effect of partially offsetting the increase for quick-paying clients. The discount is available only if the client has paid all previous invoices. From a purely financial, time-value-of-money perspective, the discount is too generous. If you issue an invoice for $1,000 on March 1, it’s better to get $1,000 on March 30 than it is to get $950 on March 15. But the rationale for doing it is not to get clients to pay in 15 days instead of 30. It’s to get paid in 15 days instead of 60, 90 or more.

We will see how it works out, but I’m hopeful that the carrot instead of stick approach is an effective one.