Legal Funding: Is it a Loan for Law Firms?
Is Legal Funding a Loan? In this new series, we explain some of the legal funding questions that we hear most often from our clients. Topping the list is the following FAQ:
“Is Legal Funding a Loan?”
On the surface, lawsuit advances–also known as pre-settlement funds–appear to resemble loans taken out from a traditional lender, but they are actually considered a form of asset purchase.
As the name implies, lawsuit advances are advanced payments of the award or legal fee that the plaintiff or attorney may receive in the future if the outcome of the lawsuit is favorable (either in the form of a settlement or verdict).
Major Benefits of Non-Recourse Transactions
Is Legal Funding a Loan? This means that the funding does not have to be repaid if the plaintiff’s lawsuit is unsuccessful. Rather, this money is for purchase of part of the recovery in a lawsuit made to qualifying applicants. If the plaintiff loses his or her case, they are not required to pay back any of their advance. This is one of the major benefits of non-recourse transactions.
Advances are available to both plaintiffs and attorneys; award advances are appropriate for plaintiffs , while fee advances are for lawyers.
Post Settlement Funding
Is Legal Funding a Loan? These funds can also help litigants whose cases have been resolved but have yet to receive payout of their award or legal fee (the industry terminology for this type of advance is post-settlement funding ).
The money allows attorneys to help cover the expensive costs associated with litigation, while plaintiffs frequently use the funds to help pay living expenses, medical bills, and other immediate needs while they wait for payout.
Get the Facts: Advances vs. Loans
Advances:
- Do not take into account personal credit scores during the application process.
- Carry a higher repayment value than loans (due to a higher risk involved with advances because they involve money that has not yet been distributed).
- Taken directly from an attorney’s or plaintiff’s future receivables.
- Future legal fees and settlements, also called future receivables, used as collateral.
Loans:
- Lent from private banks and traditional financial institutions and then repaid directly to the lender.
- Traditionally require some sort of physical collateral in order to be approved (such as bonds, stocks, equipment and real estate).
- Usually carry lower interest rates.
Lawsuit Loans? There’s No Such Thing, but There is Something Better
Is Legal Funding a Loan? For a more detailed explanation as to why legal funding is not a loan, please read our blog post entitled Lawsuit Loans? There’s No Such Thing, but There is Something Better. If you have any questions, comments, or concerns, please don’t hesitate to ask!
Written by David Smethie, Senior Marketing Director of Balanced Bridge Funding.
