What Is Attorney Funding?
Attorney funding is a subset of legal funding that is tailored specifically to plaintiffs’ attorneys. Types of attorney financing include pre-settlement funding, post-settlement fee advances, law firm lines of credit, case cost financing, and voucher funding.
But before we get too far ahead, let’s quickly go over the basics of legal funding.
A Legal Funding Primer
Legal funding, also referred to as lawsuit funding, litigation finance, or legal lending, is a type of financing that was specially developed by legal experts to help both attorneys and their plaintiff clients thrive economically while waiting on decisions to be rendered or paid out in long-lasting legal battles.
Legal funding can be customized to benefit contingency fee attorneys, whose incomes depend on whether and when their cases settle. Different funding methods can be tailored to fit an attorney’s case, budget, and time frame demands. With an advance from a legal funding company, attorneys will be better prepared to build a winning case or build a growing firm.
Why Would An Attorney Use Legal Funding?
Contingency fee attorneys sacrifice time, expertise, and money to put together solid cases without any guarantee of payment. In cases that settle in favor of the defendant, plaintiffs’ attorneys walk away with absolutely nothing.
Litigation is not just an uncertain process, but it is notoriously lengthy. The typical personal injury case, for example, has about a two year life span, from the filing of the complaint to the settlement distribution.
While that two year period may seem like a long time to wait for a paycheck, MDLs, torts, and malpractice cases can take even longer. For larger cases or cases involving minors, governments, or international entities, settlement delays of ten or fifteen years are not uncommon. Waiting fifteen years for an attorney’s fee can be financially crippling.
Don’t Let Settlement Delays Ruin Your Law Practice
As with any business, running a law firm requires a steady flow of capital. Many attorneys struggle to maintain a successful legal practice when their fees are astronomically delayed. Those fees are the lifeblood of any thriving practice: without them, it becomes enormously difficult to build cases, to find new clients, or even to maintain daily expenses.
The different types of attorney funding are designed to fit the needs of solo practitioners and larger firms alike, allowing contingency fee attorneys to thrive while waiting on their fees to be paid out. With a funding advance, attorneys can hire expert witnesses, cover discovery costs, pay for advertising and administrative costs, and maintain an office space without worrying about running out of capital.
Why Not Just Go To The Bank?
Though many small businesses have opted for the traditional financing methods of taking out a bank loan or line of credit (LOC), attorneys might find that these are not the easiest or most practical choices.
Banks perform personal credit checks as part of the loan qualification process. Because attorneys are running their businesses as individuals, their personal credit is affected by business decisions and may not meet bank standards, making approval less likely.
Banks and other traditional finance institutions typically ask for some form of collateral, such as bonds, stocks, or real estate, in exchange for a loan or line of credit. This is another reason that attorneys might have trouble meeting the qualifying standards; many attorneys who would be seeking a financing option may not have much collateral tied to their businesses.
While it is not impossible to be approved for a loan by a bank, and though bank loans often have a lower interest rate than alternative financing options, the difficult application process and monthly repayment requirement may be discouraging to many attorneys who are in need of immediate capital.
How Does Legal Funding Work?
Legal financing is different from a bank loan or a line of credit in two ways: First, from application to distribution, it was specifically designed for attorneys and their clients. Second, except for the Attorney Line of Credit (described in more detail below), legal funding is an advance, not a loan. This means that all the money that attorneys receive from legal funding advances come from their own future fees. Advances to plaintiffs would come from their settlement awards.
Legal funding agreements are made between plaintiffs’ attorneys and third party lenders (legal funding companies). For all types of legal funding aside from the Attorney Line of Credit, plaintiffs and attorneys must be engaged in ongoing litigation or have recently settled a case before submitting a legal funding application.
An Attorney-Friendly Application Process
Legal funding applications were designed with attorneys in mind, so they are structured differently than applications for bank loans or lines of credit.
Unlike banks, which ask for non-liquid collateral in exchange for future capital, lawsuit funding companies accept future receivables as collateral. For attorneys and law firms, case inventories count as future receivables. Legal funding firms understand the potential value of a pending lawsuit or a settlement, so they can accept case inventories as proof that attorneys and law firms will be able to repay advances.
Legal funding firms do not require personal credit checks to confirm an application for two reasons. As mentioned above, funding advances are taken out as business expenses, not as personal expenses, so personal credit checks are unnecessary. Furthermore, with most types of legal funding, attorneys are not directly responsible for repaying advances. Instead, payments are taken directly out of attorney escrow accounts, administrative accounts, or obligor accounts.
After an applicant has been approved, a portion of the attorney’s pending settlement will be purchased from the obligor. The funding company purchases only a portion of the advance as a way to minimize risk and to ensure that the attorney will have access to fees later on. A funding company will typically purchase between only 10% and 50% of an attorney’s fee from an obligor.
Attorneys can receive their funding within 48 hours after their agreement has been approved. There are no limits to how attorneys can spend their advances to enhance their business.
What Types Of Lawsuit Funding Are Available To My Plaintiff Clients?
The two main types of plaintiff lawsuit funding are pre-settlement and post-settlement funding. As their names suggest, pre-settlement funding is available only before a case has been settled, while post-settlement funding becomes an option after a settlement has been reached.
Pre-Settlement Lawsuit Funding For Plaintiffs
Because even the most common forms of personal injury cases can take up to two years to reach completion, plaintiffs need a source of funding during this time to get through day-to-day life and to cover any expenses associated with their lawsuits.
Of the two types of legal funding available to plaintiffs, pre-settlement funding is more expensive because of the greater risk involved. When plaintiffs apply for pre-settlement funding, there is no guarantee that a settlement will be reached, so funding companies usually charge a higher premium.
Post-Settlement Award Advances For Plaintiffs
Settlements are typically not distributed immediately after a case has settled, so plaintiffs may still find themselves waiting to see their legal compensation for months or years after a case has come to a close. For plaintiffs who need access to their settlement award but do not want to pay for the risk associated with pre-settlement funding, a post-settlement award advance may be the best choice.
Though there is always a small chance that the plaintiff’s obligor would be unable to pay the agreed upon settlement, legal funding companies offer post-settlement funding as a non-recourse agreement, meaning that even in the case of non-payment, plaintiffs would be able to keep any money that was advanced to them.
What Types of Attorney Funding Are Available To Me And My Law Firm?
Of the four main types of legal funding available to attorneys, two are very similar to those available to plaintiffs: pre-settlement funding and post-settlement funding.
Voucher Funding is a type of advance that is available only to attorneys who have been hired by state governments.
An Attorney Line of Credit is a type of funding that does not follow the guidelines set out above; structurally, it is similar to a bank line of credit, though it is customized to benefit attorneys.
Pre-Settlement Attorney Funding
Trying a case without access to the money granted by legal fees may prove difficult for many lawyers, especially when competing against well-funded defendants like insurance companies and multi-million dollar organizations.
Pre-settlement legal funding may be the right option for an attorney who needs more capital to build a winning case. With a funding advance, attorneys can afford to put more resources into the discovery, travel, interviews, and research needed to reach the desired settlement.
Like the pre-settlement funding option available to plaintiffs, this financing solution is available only before a case has been settled. The premium for pre-settlement funding is higher than that for other types of legal funding because there is a greater risk that a case will not be settled, and thus a greater risk that the advance will not be repaid.
Post-Settlement Funding For Attorneys
After a case has been decided, attorneys may still face a long wait time before receiving their hard-earned legal fees. Without access to these fees, it becomes frustrating and challenging to pursue new cases, secure new clients, and maintain a functioning practice.
Contingency fee attorneys can select the post-settlement funding option, which is available only after a case has been decided, to receive an advanced portion of their legal fees. With this advance, attorneys will have the necessary funds to expand their practices.
As with the plaintiff post-settlement funding option, attorney post-settlement litigation funding is non-recourse. This means that if for some reason the obligor were unable to pay the agreed upon settlement amount, preventing the payment of attorney fees, that attorney would still keep any portion of the fee that was advanced under a legal funding agreement.
Voucher Funding For Attorneys
Many attorneys are appointed by the government as public defenders, also known as indigent defense attorneys. Because these attorneys are on the state payroll, they are supposed to receive their legal fees directly from the state. States offer vouchers to these attorneys as a promissory note.
Typically, state appointed attorneys have to wait only one or two weeks to receive their pay. Unfortunately, due to economic downturns that have affected numerous states over the past few years, public defenders have been forced to wait months for their pay.
Voucher funding works much like post-settlement funding does in that it can occur only after a voucher has been issued. Once a voucher funding application has been approved, the legal funding firm will purchase a portion of the attorney’s expected fee and the attorney will receive that portion as an advance. The legal funding firm will be repaid directly from the obligor, which in this case is the state that hired the attorney.
Attorney Lines Of Credit
Unlike the other forms of legal funding mentioned above, an attorney line of credit (also commonly referred to as law firm funding or law firm line of credit) is not advances. Instead, it functions in the same way as bank lines of credit do. The main difference between bank LOCs and attorney LOCs is that, as with pre- and post-settlement funding advances, legal funding companies accept case inventories as collateral.
The amount of capital extended in line of credit depends on the size of a law firm’s case inventory. An LOC can be increased as a case inventory grows.
Lines of credit are great options for law firms that are seeking to advance on any level. Whether they are looking to expand their marketing efforts, bring on new staff, or increase their caseloads, a line of credit offers a continuous source of capital that can be withdrawn on a monthly basis. Repayment plans are flexible and can be arranged to fit the specific needs of an individual law firm.