Trial lawyers face a Catch-22 when they work to build their litigation business: they always need additional capital to take on potentially lucrative new cases, but accumulating these funds is a challenge. Day-to-day costs of running a practice and providing existing clients with optimal service can consume recoveries on existing cases.
A complete understanding of all the funding options can help trial lawyers grow their practice and stay on the path to future success without impairing their existing business. For those who feel stuck in the Catch-22 of capital formation, here’s a basic primer to help you understand your choices, so you can determine what makes sense.
Law Firm Loans
A law firm loan can come in the format of a Small Business Administration (SBA) loan, a business loan, or a working capital loan. SBA loans benefit from capped interest rates; however, qualifying for one typically requires significant collateral, and the application and closing process can be lengthy. A business loan is a traditional loan taken from a bank. The amount you can borrow and the interest rate are assessed according to your income, the value of your assets, and your credit rating. Business loans can be problematic if you are trying to grow a new practice and do not yet have a consistent and steady revenue stream. Bank loans also tend to come with high monthly compounding interest rates, which can be risky if your cases don’t go the way you expect. And like SBA loans, they can also take time to secure. A working capital loan is another option, but it is essential to research the terms. You will be able to borrow and repay the money quickly. Still, these types of loans typically come with extremely high interest rates. No matter what kind of loan you take, if you cannot pay it back, you’ll have to use whatever collateral you provided to make good on your debt.
Law Firm Financing
The terms “law firm loans” and “law firm financing” are often used interchangeably, but they are quite different. Unlike loans, law firm financing is tailored to lawyers and their work, enabling them to get paid for future income with less risk. For example, income derived by lawyers from unearned contingency fees is increasingly acknowledged as an asset that can be sold to a funding company. The funder only purchases an interest if income is realized, i.e., the lawyer earns contingency fees on the case being litigated. Law firm financing also doesn’t require the lawyer to make fixed payments; the funder only recovers a lump sum at the end of the case. The immediate infusion of cash from this type of “law firm financing” can cover the cost of business operations and marketing campaigns, so you can focus on practicing law and growing your business. Raising capital this way has the added advantage of allowing you to offer clients flexible payment options, which is increasingly becoming a make-or-break factor for people choosing between firms.
All too often, plaintiffs do not recover the full value of their claim because they do not have the financial resources to go through a long legal battle. Instead, plaintiffs accept a “lowball” offer from an insurance company to resolve their legal claims because they need the money now to pay for their daily expenses. When a plaintiff’s lack of financial resources is in the way of a full recovery in court, pre-settlement funding can help. Pre-settlement funding – legal funding, litigation financing, and legal financing – is an advance of capital by a legal funding company to a plaintiff pursuing a legal claim. In exchange for that money advance, the funding company purchases an interest in any recovery the plaintiff achieves on the legal claim. The advance “levels the playing field” by giving plaintiffs the chance to obtain justice on their claim, even when their case is complex, and the process is lengthy. This type of funding is not a loan and does not require a credit check. The funding company only receives a fixed dollar amount if there is a recovery on the legal claim. If the case is lost, the funding company receives nothing in return for its money advance.
In personal injury cases, plaintiffs can have significant medical issues that support their claim. Doctor visits, treatment and rehabilitation programs, and surgeries are critical to the plaintiff’s health and serve as substantial evidence in court. Still, they can’t always pay for the medical care needed to treat their injuries. Suppose you have a client with a compelling case who cannot afford to get the medical attention they need. In that case, medical funding can cover everything from transportation to and from appointments to major surgeries and procedures.
A victory in court does not necessarily mean an instant payout. Sometimes, winning a case is only half the battle. Defendants can take months and even years to pay what they owe. Suppose a case is won, but the payment waiting game is dragging on. In that case, post-settlement funding – sometimes called settled case funding – can provide instant financial relief to plaintiffs and lawyers. Providing documentation of the case outcome and the amount owed will enable your client to get an advance from a legal funding company on their settlement in return for granting the funder interest in part of the payout when it occurs.
The right financing can provide lawyers with access to capital and open opportunities that pave a path to legal success that benefits them and their clients.
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