WIP Finance for Law Firms: Funding Work in Progress, Disbursements and Lock-Up

What WIP and lock-up mean in a law firm

Work in progress, or WIP, is the value of chargeable time and work recorded on a matter that has not yet been billed. Debtors, sometimes called receivables, are bills that have been issued but not yet paid. Together they make up lock-up: the value of work the firm has done but not yet turned into cash.

Every law firm has lock-up. It is a natural consequence of doing work first and billing later. The question is how much cash it absorbs and for how long. In a firm handling long-running litigation, personal injury or clinical negligence claims on a conditional fee basis, WIP can build for a considerable time before any fee is recovered. In a conveyancing or private client practice billing on completion, it may turn over more quickly, but volumes and disbursements still create pressure.

Lock-up is usually measured in days, combining how long work sits unbilled with how long bills remain unpaid. Our guide to reducing lock-up explains how to measure it and what practical steps bring it down. This guide focuses on how law firms fund it.

Why profitable law firms run short of cash

A firm can show a healthy profit in its accounts and still struggle to pay salaries, rent and suppliers. The profit and loss account recognises work as it is done; the bank account only sees the cash when the client or paying party settles. The gap between the two is lock-up.

Several features of legal practice widen that gap:

• Deferred fees. Under conditional fee agreements and damages-based agreements, the firm may be paid only if and when the case succeeds, and costs recovery from the other side can take further time.
• Disbursements. Court fees, counsel’s fees, expert reports, medical records and search fees often have to be paid out long before they are recovered.
• Growth. Taking on more matters, particularly in contentious work, increases WIP before it increases cash. Fast-growing firms often feel the squeeze most.
• Fixed overheads. Staff costs, rent, practice software and professional indemnity insurance are paid on a regular schedule regardless of when fees arrive.
• Annual liabilities. Tax, VAT and practising certificate fees can land at times when cash is already committed. See our guide to funding corporation tax and VAT.

Recognising that the shortfall is structural rather than a sign of poor performance is important. It changes the question from "how do we cover this month" to "what is the right long-term way to fund our working capital".

The funding options available

The Law Society’s guidance on seven funding options your law firm could consider is a useful starting point, and sets out the broad range of routes available to smaller firms. In practice, the main options for funding WIP and lock-up are:

• WIP finance. A facility advanced against the value of work in progress on a portfolio of matters, often used by firms with contentious or conditional fee caseloads. The amount available depends on how the lender values the WIP and its likelihood of recovery.
• Disbursement funding. Finance that pays for, or reimburses, disbursements such as medical reports, expert fees and counsel’s fees, repaid when the case concludes and costs are recovered.
• Court fee funding and costs funding. Facilities that cover issue fees and other court costs, or that bridge the period between a successful outcome and receipt of recovered costs.
• Invoice or receivables finance. Funding against issued bills, releasing cash before clients or paying parties settle. Suited to firms with a steady stream of billed work.
• Overdraft or revolving credit facility. Flexible borrowing that can be drawn and repaid as cash flow moves, useful for smoothing timing differences.
• Term loans. A loan repaid over an agreed term, suited to a permanent increase in working capital, or to consolidating short-term borrowing into a predictable structure. See practice working capital.

Many firms use more than one of these. A personal injury practice might combine disbursement funding with a WIP facility, while a commercial firm might pair a revolving facility with invoice finance. The right mix depends on the firm’s work types, billing pattern and existing borrowing.

How lenders assess a law firm’s case mix and billing

Lenders that specialise in legal sector funding look well beyond turnover. Because WIP and disbursement facilities are ultimately repaid from case outcomes and bill payments, they want to understand the quality of the underlying work.

• Case mix. The spread of work types, the proportion of contentious and non-contentious matters, and how concentrated the firm is in any one area.
• Funding arrangements with clients. Whether matters are on hourly rates, fixed fees, conditional fee agreements or damages-based agreements, and whether after-the-event insurance is in place where relevant.
• Success and recovery rates. Historical outcomes, how much of recorded time is ultimately billed and recovered, and how much is written off.
• Billing discipline. How regularly the firm bills, the use of interim bills and payments on account, and whether WIP is reviewed and written down promptly when it is not recoverable.
• Debtor management. The age profile of unpaid bills and the firm’s credit control process.
• Systems and supervision. Practice and case management systems that give reliable WIP data, and supervision arrangements that give comfort on case handling.
• Regulatory position. Compliance history, accounts rules reports and insurance arrangements.

Firms that can produce clear WIP and debtor reports by fee earner and work type, reconciled to their accounts, are in a much stronger position. Our guide to preparing a practice finance application explains how to pull that information together.

Lenders also look at the people behind the numbers. The experience of the partners or members, the depth of the fee earning team, key person dependency in specialist departments and the firm’s plans for growth all feed into a lender’s view. A short narrative explaining the firm’s strategy, how new matters are selected and how WIP is reviewed and written down can make a material difference to how a case is received, particularly where the headline figures show rapid growth or an unusual profile. Presenting that narrative clearly, alongside the numbers, is a large part of what a broker does when approaching lenders.

Client money and office money: a firm line

Any discussion of law firm cash flow has to start from a clear principle: client money is not available to fund the firm. The SRA Accounts Rules require firms to keep client money separate from money belonging to the firm, and restrict what client account can be used for. Working capital must come from office money: the firm’s own funds, profits retained in the business, partner or member capital, and properly arranged external finance.

This has practical consequences for funding. Disbursements paid on a client’s behalf should be funded from office account or a dedicated funding facility, not by drawing on money held for other clients. Where a funder pays disbursements directly, or where funds pass through the firm, the flow of money needs to be set up so that it is correctly classified and recorded. Some funding arrangements also affect how and when the firm can transfer costs from client to office account once a bill has been delivered.

The detail of how the Accounts Rules apply to any particular funding arrangement is a matter for your COFA and, where needed, your reporting accountant or regulatory adviser. What lenders want to see is that the firm understands these obligations and has the controls in place to meet them.

Fixed fee versus conditional fee matters

The way a firm charges its clients has a direct bearing on which funding options fit.

Fixed fee and hourly-billed work, such as conveyancing, wills and probate, family and much commercial work, generally produces bills at predictable points: on completion, at stages or monthly. Lock-up is driven mainly by billing frequency and how quickly clients pay. Invoice finance, overdrafts and revolving facilities tend to suit this pattern, alongside tightening billing practices such as payment on account.

Conditional fee and damages-based work, typical of personal injury, clinical negligence and some commercial litigation, can involve long periods where WIP grows and disbursements are paid out with no fee income on the matter. Recovery depends on the outcome and, often, on costs being agreed or assessed. Here, WIP finance, disbursement funding and costs funding are designed specifically for the cash flow profile, and lenders will focus heavily on the firm’s track record of success and costs recovery.

Mixed practices often need a combination: flexible working capital for the transactional side and case-linked funding for the contentious side. Structuring the two so that they work together, rather than competing for the same security, is part of arranging the right facility.

Choosing a structure that fits

The cheapest-looking facility is not always the right one. When comparing options, it helps to think about:

• Match to the cash flow gap. A temporary peak in disbursements suits flexible, short-term funding. A permanent increase in WIP from growth suits a longer-term structure.
• Total cost. Interest or discount charges, arrangement and non-utilisation fees, and any costs of reporting or audit required by the lender.
• Security and guarantees. What the lender takes security over, whether personal guarantees are needed, and how that interacts with existing facilities.
• Reporting. Some facilities require regular WIP or debtor reports. Make sure your systems can produce them reliably.
• Flexibility. Whether the facility can grow with the firm and how easily it can be reduced or repaid.

Finance should bridge a genuine timing gap, not mask a structural problem such as consistently unrecoverable WIP or poor billing. Where lock-up is higher than it needs to be, combining funding with operational improvements usually produces the best result. Where a partner or member is borrowing personally to inject capital, our guide to partner capital loans explains how that works. Where a sole practitioner or small partnership borrows, finance of £25,000 or less can be regulated consumer credit, and we will say at the outset if that applies.

How we can help

We are a whole-of-market commercial finance broker with access to 300+ lenders, including specialist legal sector funders, disbursement funders, invoice finance providers, and high-street and challenger banks. We take the time to understand your work types, billing and lock-up, then search the market and approach suitable lenders with a well-presented case. All finance is subject to status, lender criteria and approval.

Read more about WIP finance, aged debt and lock-up finance and our work with solicitors and law firms, see how it works, or make an enquiry.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.