Factoring Receivables for Lawyers – Helping to Manage Cash Flow
Factoring Receivables for Lawyers. Legal funding is an alternative financial solution for plaintiffs and attorneys experiencing cash flow issues.
You might have read that phrase numerous times, but what do we actually mean when we talk about an “alternative financial solution”? And what types of cash flow issues are plaintiffs and attorneys experiencing?
Let’s answer the second question first so we can have an easier time answering the first.
What Causes A Cash Flow Stoppage?
Factoring Receivables for Lawyers. As you already know, plaintiffs’ attorneys represent their clients (aka plaintiffs). And you probably already know that plaintiffs’ cases can take anywhere from a few months to many years to reach a judgment or settlement, depending on the complexity of the case and/or the amount of outside information necessary to litigate the case.
Even after a settlement or judgment is reached, the payout may be further delayed as the defendant gathers funds or as the proper paperwork is filed.
Plaintiffs and Attorneys Experience Cash Flow Problems
Factoring Receivables for Lawyers. Plaintiffs and attorneys might start to experience cash flow problems the minute litigation begins. Most of the attorneys trying plaintiff cases work on a contingency fee basis, meaning that they don’t get paid until a case settlement or judgment award distributes. And of course, plaintiffs won’t be receiving any money until this point, either.
For attorneys, going months or years without payment will take a serious toll on both business and personal proceedings. If solo practitioners or law firm partners don’t get paid, they can’t pay their associates, can’t maintain their offices, can’t pursue new clients, and can’t market their services. They also struggle to support their households, meet car and mortgage payments, and enjoy a stable quality of life.
Plaintiffs also suffer when they wait for settlement awards. These individuals typically engage in litigation as a response to severe hardship, such as medical malpractice, personal injury, or employment discrimination. Such events often leave individuals in pain, in debt, and unable to work.
Factoring: The Alternative Financial Solution
Factoring Receivables for Lawyers. A pending attorney fee or a settlement award can be classified as a “future receivable”, or a payment that will be received in the future. As described above, attorney fees and settlement awards can be delayed far into the future, making life difficult for plaintiffs and attorneys.
Factoring is a financial transaction that functions with three basic elements:
- A seller with future receivables, such as legal fees or settlement awards
- An obligor, like the defendant that would be paying out the future receivables
- A third-party factor, which we’ll talk about more in a minute.
Future Receivables Made Available in Advance
Factoring Receivables for Lawyers. When money is financed through a factor, it’s called an advance, because the future receivables are being made available in advance. Advances aren’t only granted to attorneys and plaintiffs: real estate agents and other salespeople can be given commission advances, merchants can be granted invoice payment advances, and medical staff can be paid insurance advances.
Basically, any type of payment that could possibly be delayed could potentially be advanced in a factoring arrangement. Generally, factoring works something like this:
An individual or business (for now, we’ll call them the seller) with delayed future receivables will sell a portion of those future receivables to a third-party factor. The factor purchases the receivable at a discount , so the seller receives a sum equal to the amount of the discounted purchase price. When the obligor eventually distributes the receivables, the full amount is paid directly to the third-party factor.
What Does Factoring Have To Do With Legal Funding?
Factoring Receivables for Lawyers. Legal funding operates on a factoring model like the one described above. In the legal funding system, plaintiffs or attorneys are the sellers, the defendant or insurance company is the obligor, and the legal funding company is the third-party factor. As mentioned earlier, the future receivables are settlement awards or attorney fees for plaintiffs or attorneys, respectively.
Legal funding was specifically created to address the problems that attorneys and plaintiffs face due to lengthy litigation processes and delayed settlements. It differs from many other factoring systems in a few ways.
Legal Funding Differences from Other Factoring Systems
Factoring Receivables for Lawyers. First, attorneys and plaintiffs often wait for their future receivables for a much greater time period than professionals in other industries.
Second, and most significantly, the legal funding underwriting process focuses less on individual credit scores and financial information and more on issues significant to the litigation process, like claim liability, damages, and the recovery timeline. Underwriters will also take an attorney’s portfolio of cases into account when reviewing an individual’s or firm’s ability to pay.
By widening the scope of underwriting to include not just typical financial reporting but also these essential aspects of trying plaintiff cases and running a law firm, legal funding firms have customized their entire operations to best fit those that they are trying to help.
Why Go “Alternative”?
Factoring Receivables for Lawyers. It’s true that there are plenty of other financial options out there for plaintiffs and attorneys alike. And if you haven’t heard of factoring before, you’re not alone—it’s not the most common financial solution out there. Bank loans and small business loans are much more popular, in part because they charge much lower interest rates.
But unfortunately, loans aren’t always easy to qualify for. Most traditional lending institutions place great value on credit scores and background checks, which are admittedly important—legal funding companies may also take these factors into account to varying degrees. However, a poor credit score or financial history is more likely to be cause for disqualification at a traditional lender than at a legal funding company.
Legal Funding Companies Offer Streamlined Application Process
Factoring Receivables for Lawyers. Though rates may be higher, legal funding companies offer a streamlined, litigation-friendly application process for plaintiffs and attorneys alike. As described above, the underwriting process is designed to take litigation factors and attorney qualifications into account.
Legal funding is not the only financial option out there, nor is it the first option that many plaintiffs and attorneys look at. But for those who may have trouble accessing a loan and who are struggling with cash flow and payments, legal funding’s factoring system provides a viable option for success.