In the last installment, we discussed how fostering a working relationship with a reputable lawsuit funding company can prove to be a valuable asset for your firm. Since each lawsuit is unique, attorneys often require flexibility from a lawsuit funding company to provide much needed liquidity for clients. These funds can be used for any purpose ranging from surgical procedures to daily living expenses.
In this installment, we tackle the first step in finding a reputable lawsuit funding company and assuring that the terms of the agreements are fair and completely transparent.
Almost all lawsuit funding agreements assign property rights in a portion of the future proceeds of a pending litigation. The contracts are drafted in this way so the transaction is deemed “non-recourse”. In other words, if there is no monetary recovery in the case, there is no repayment of the advance. Although percentages and time are factors that will dictate the eventual repayment amount, these transactions are not loans (sometimes they are called “lawsuit loans“) so they are not technically governed by state usury laws.
While there is a wide range of pricing methods used by different lawsuit funding companies, the vast majority of contract repayment schedules are calculated in one of two ways.
The first way is through a compounding monthly rate. The normal range is 2.5% to 3.5% per month. The second way is by calculating a simple interest rate based on the contract amount. Clients can expect to see a range from 18% -50% every six months until the case is settled and advance repaid.
All Rates Are Not Equal
You may be surprised to learn that a compounding monthly rate may not be as oppressive as it sounds. In fact, if a lawsuit were to settle within the first 6 months after an advance, the average compounding monthly rate is cheaper than a flat rate calculation. After that time frame, but before 24 months, both rate structures are remarkably similar. Only after 2 years is the compounding effect noticeable.
There are pros and cons to both lawsuit loan rate structures. And although the contractual language of lawsuit funding transactions is not complex, what personal injury attorney wants to spend the time becoming an expert in this field? As attorneys, we cannot be an expert in everything. Couldn’t your time be better spent elsewhere?
The nuances of these contracts are easily grasped when you have a “go to guy” in the lawsuit funding business. A good working relationship with a funder you can trust will save you a great deal of time in the long run.
Hard to Foresee the Future
Lawsuit funding operations design contracts which protect their interests in the event a dispute arises. Obviously, the lawsuit funding company is concerned with repayment of capital. However, an intelligent lawsuit funding company is also concerned with creating mutually beneficial relationships with attorneys and their clients.
While it is difficult to foresee what the future holds, professional funding operations understand the value of repeat business and will usually be reasonable if settlement negotiations break down. Having to take a reduction on a single case is far more palatable when that same firm has previously referred dozens of clients for funding.
What is the First Step?
Contact a funder about their programs and make sure you get at least a ball park estimate of the costs associated with their typical advance. The costs should include items such as process fees, underwriting fees, application fees, and origination fees, if any. Attorneys should ask questions about how the advance is amortized, when the payback is expected and what exactly are the attorney’s obligations under their typical agreement.
By beginning a dialogue, you will get a feel for whether the funding company is up front and honest with the information you request and you can get a sense of what it will be like to do business with the company in the future.
At Fair Rate Funding, we want to be that resource for your firm and your clients. We are plaintiff advocates in that we afford litigants the financial support they need to pursue their interests in the court system.
If you have any questions of any kind about how lawsuit funding can help your practice, please contact us at 888-964-2224.
In the next post, we will discuss other material terms of the typical lawsuit funding contract, what terms are negotiable and what terms are set in stone. We will also touch upon some additional benefits law firms receive when dealing directly with a lawsuit funding company.
Previous installments of this series can be found here.
Thank you for your interest in the lawsuit funding business.