Lawsuit funding buyouts occur when a plaintiff receives money against his lawsuit prior to settlement and then, some time later, needs another advance. These financial transactions are called “lawsuit funding buyouts” because in the vast majority of instances, the previous advance is repaid and that amount (plus the additional funds) are rolled into one contract. In other words, the total amount of advances are “re-financed” into one deal.
Why Lawsuit Funding Buyouts Occur
Lawsuit funding buyouts occur whenever a plaintiff receives a lawsuit cash advance from one funding company and seeks additional funding from another company. While many funding enterprises offer additional funding to existing clients, others may have a policy that limits the amount and/or frequency of funding. In other instances, clients may have a strained relationship with the existing funder and wish to bring their business elsewhere. Other lawsuit funding buyouts occur because another investor is simply uncomfortable offering additional funds.
One of the greatest aspects of the lawsuit funding business is its flexibility. Lawsuit funding deals are evaluated by underwriters who assess the risk associated with a particular lawsuit and analyze how much, if any, money can be advanced and still fit within the needs of the particular investment portfolio. The underwriting process is extremely subjective because each underwriter and/or underwriting committee has specific needs and different areas of expertise. In other words, when some funding companies might reject a particular case for additional funds, often, there are other investors willing to step in and take on the risk.
This flexibility helps plaintiffs get the financial relief they seek and helps investors provide an efficient marketplace to apply their craft. This is a “win-win” scenario for lawsuit funders AND plaintiffs alike.
Why Do Lawsuit Funding Companies Insist on Paying Off the Prior Advance
One aspect of an unregulated marketplace is flexibility as described above. Another is a wide range of pricing offered to plaintiffs seeking settlement loans. Those looking for “lawsuit loans” can expect to see rates ranging from 2.5% per month to 4.5% per month. Although there are other reasons, the pricing range is a primary reason why it is standard policy to payoff a previous advance when additional money is requested.
From an investors perspective, the order in which funds are paid at the time of settlement is extremely important. Other lawsuit funding liens, such as attorney’s fees and expert costs, are deducted from the amount the client ultimately receives. When it comes to prioritizing lawsuit funding “liens”, an investor who made the first advance would have a strong argument in favor of being paid first.
This is a potential problem. For example, let’s say there are two funding companies with open contracts for a particular case. The first contract is running at 4.5% per month and the second is running at 2.5%. If you were that second investor, you would be worried there may not be enough proceeds to pay off the advance in the event the case drags on longer than expected (and they sometimes do).
In light of the above described scenario, the policy of requiring a buyout of previous settlement loans makes sense.
What Clients Need to Know About Lawsuit Funding Buyouts
Clients need to understand the following when applying for additional funds:
First, clients must understand that pricing may differ and their second advance may be under terms that could be worse than the original advance.
Second, a second advance of funds which occurs a short time after the original advance can cause the client to pay double interest for the original term. Lawsuit funding contracts normally calculate the payment based upon how long it takes for the lawsuit to reach settlement or otherwise be resolved. There is normally a three to six month minimum repayment which represents the first time period. As soon as the client receives the advance, the payoff reflects the charge for the use of the money for the first term.
When a client takes an additional advance only a few weeks after the original transaction, they have to pay the charge for that first term. Then when the next contract is entered, the first term is charged again for the new contract. For this reason, it is recommended that the client ask for an amount he expects to need for at least the first six months.
Third, there may be investors in the market place that will agree to a “second position” on a case. In other words, there may be available funding for clients who need additional funds but who do not wish to payoff the original advance. Although some of these investors exist, it may be difficult to find them as the standard industry practice is to payoff the original advance.
Lastly, lawsuit funding buyouts can help clients refinance their existing deal at more favorable terms. Often clients are in such a rush for cash that they take whatever deal is presented to them. Later, after the immediate stress is relieved, they come to learn that there are better deals out there and at more reasonable terms. In this scenario, a buyout could provide additional cash and a better deal – another testament to the flexibility the lawsuit funding industry can provide.
Thank you for your interest in lawsuit funding buyouts and the settlement funding business in general.