Legal Funding: A Cash Flow Solution For Plaintiffs And Attorneys

Legal funding is a relatively new financing option for plaintiffs involved in lawsuits as well as the attorneys representing them on a contingency fee basis. There are many different terms used interchangeably for legal funding, including third-party financing, litigation funding, lawsuit settlement funding, presettlement financing, post-settlement funding, lawsuit loans and litigation finance. The list goes on and on. However, for simplicity’s sake, we’re going to stick with “legal funding” throughout the rest of this article.

So, what exactly is legal funding? According to Legalist, legal funding is the process through which both plaintiffs and law firms can finance litigation or other legal related expenses through a third-party funding company. These finance companies provide advances to their clients in return for a portion of their award, settlement, legal fee or judgment. According to the Litigation Finance Journal, such transactions are “non-recourse, meaning that if the client loses the case, the funder cannot pursue the client’s other assets unrelated to the litigation to gain satisfaction.”

Let’s analyze the above definition, as a lot of big words are thrown around trying to describe a relatively simple concept. A third-party funding company is simply the firm that provides a cash advance, or legal funding, to the client, which can be either a plaintiff or law practice. Such firms that provide these advances are commonly known as legal funding companies.

According to the second part of the definition, if the plaintiff (or attorney working on a contingency fee basis) does not win his case, then they are not responsible for repayment of the funds advanced by the third-party finance company. Notice how we’re using the term “advance” and not “loan.” Because there is no payment necessary unless there is a favorable outcome in terms of a settlement, award or verdict, legal funding advances are not loans but are, instead, non-recourse transactions. The “non-recourse” concept is important to understand, as it is the main factor differentiating legal funding from traditional financing such as loans and lines of credit.

Because legal funding transactions are non-recourse, there is generally a portion of advances where the funding companies are unable to recoup their investment. This is why legal funding is more expensive than more traditional financial options such as bank loans, credit lines and low-rate credit cards. So, if legal funding is more expensive, why not just use a cheaper option?

In “The Essential Guide to Legal Funding,” which I wrote and published to educate the public about the legal funding industry, I make it clear that legal funding shouldn’t be your first option. I suggest that, before committing to a legal funding advance, the following options should be explored:

Plaintiffs should apply for a loan or credit line from a bank, use their credit cards, request financial help from family and friends, use money stashed away in a savings account or take out a loan against their 401(k). If you’re a lawyer, try to increase referral fees and referral traffic, expand upon your network by attending local events, use credit cards and savings accounts or apply for a small business loan.

So, whether you are a plaintiff involved in a lawsuit and need money while awaiting a settlement or an attorney in need of capital waiting to receive your contingency fee, legal funding can be a valuable solution to your cash flow problems. Just make sure to exhaust cheaper financing options first, if at all possible.