Attorney Lawsuit Funding and Other Options for Personal Injury Law Firms

0
1091

Obtaining attorney lawsuit funding against the potential future fees of existing personal injury client claims is a fairly recent specialty finance area.  While many larger mass-tort firms utilize lawsuit funding for law firms in their businesses, smaller personal injury firms have recently been offered access to lawsuit funding partly in response to the Covid-19 response and its impact upon the legal practice.  This post will discuss attorney operating expense funding for smaller personal injury practices.

The Nature of Personal Injury Practice

Personal injury attorneys understand the need for investment in their practices.  Larger cases are more diligently defended.  Often, this means more money invested in litigating the claim.  Unfortunately, cash flow issues can and do arise in practices in which the bulk of the revenue comes from contingency fee retainers.  

It is not only plaintiffs themselves who must wait months or even years before they receive compensation for their injuries.  Contingency fee attorneys must also play the waiting game.  A typical personal injury case can take up to two years to conclude.  Compounding the problem is the multitude of post-settlement delays that often occur.  These can include dealing with Medicare/Medicaid liens, cases involving minors, friendly hearings and other delays. 

With cash flow issues, running a successful personal injury law firm can become difficult.  Since all businesses need access to cash, the inability to count on a steady stream of income makes personal injury practices challenging.  Sometimes it seems as if it is only “feast or famine”.  But there are solutions.  Below is a discussion of just a few. 

Personal Injury Law Firm Funding Options

Term Loans for Law Firms

A term loan is a loan from a bank for a specific amount. Term loans generally have specific repayment schedules and either a fixed or variable interest rate. A law firm would normally qualify for a term loan if it were an established business with sound financial statements. They are generally used to purchase fixed assets such as new computer equipment, office furniture, or new office space. They normally have terms ranging from 1 to 25 years with shorter-term loans often requiring balloon payments which are larger payments made at the end of the term.

Term loans for law firms generally require collateral and a rigorous approval process since the lender aims to reduce risk. Also, law firm term loans often carry no penalty for pre payments or payments in full ahead of schedule.

Law Firm Credit Lines

Business lines of credit are normally used for recurring expenses such as payroll funding short term office projects or any other short term capital need. Generally, businesses draw on their line of credit and repay the balance when it makes sense. These are revolving credit lines which means that the available capital replenish is every time the balance is paid off. Law firms generally use these types a financing for payroll or ongoing marketing campaigns and are especially suited if the firm is unsure exactly how much money will be needed for the projects.  Law firm lines of credit are generally smaller than term loans and often the rates are variable which means they fluctuate as the cost of money fluctuates in the open market.

Personal Loans from a Bank or other Financial Institution

Assuming a partner or member of the firm qualifies for this type of financial product, personal loans may be the most cost-effective method of getting attorney funding. Yet, there are some trade-offs, especially if collateral is pledged as security.  An example of this might be pledging real estate, stocks, or other property.  The rub is that people with these types of assets could simply liquidate the holdings and use the proceeds for the firm’s plans.  Nevertheless, there are many reasons why a personal loan could make sense as a solution for law firms.

Law Firm Funding

A newer option appeared on the legal landscape in the last couple of decades.  Sometimes referred to as law firm funding or non-recourse legal loans, law firm funding attempts to tap into the small to mid-size law firm market which derives its revenue from contingency fees such as those commonly associated with a personal injury practice.  PI law firm loans thus have become an excellent source of capital for firms wanting to increase advertising, pay for experts, payroll, capital equipment and any other investment.  

Law firm loans approval amounts are generally based upon the potential fees connected with the clients currently on retainer.  Law firm loan lenders will likely look for a decent amount of cases with a high probability of success.  Because of this, medical malpractice law firms may be approved for lesser amounts than a firm specializing in catastrophic Jones Act cases for example.

One benefit of law firm funding is that the advancing of fees is not contingent on a high credit score.  Also, there are usually no restrictions on the use of the funds.  Law firm funding companies do not get involved with the handling of the cases, so the firm is left to ply its trade as it sees fit.  This may be the most flexible law firm funding option available in that it offers minimal paperwork, quick underwriting, and fast approvals.  Firms investigating law firm funding will find these instruments more costly than other options in terms of dollars repaid.  Proponents argue the increased cost is outweighed by the benefits.

Law Firm Capital – Conclusion

The purpose of this writing was to outline some available liquidity options law firms can access when the need arises. Because of the freedoms we enjoy in business, available options have never been more plentiful. Law firms can now choose from traditional loans for businesses to specialty finance options. More options generally lead to better decisions, and we all benefit as a result.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.