When it comes to financing your firm, you have a lot of options. You can self-finance, partner with co-counsel, utilize credit cards or take out a business loan—just to name a few.
Before you make a selection, you should have a clear understanding of the solutions available to you. Without a full appreciation of your choices, how will you know you’ve picked the right one? This means looking not only at traditional financing options, but also those specifically tailored to a plaintiffs’ practice.
Below is a list of the most common types of specialty financing for plaintiffs’ firms and a brief summary of what you should know about each:
- Specialty Lender Lines of Credit
Lines of credit from specialty lenders operate much like revolving lines of credit offered by banks. You get approved for a sum of money and then you can borrow up to that amount, as you need it. Interest is only charged on what you actually withdraw—not on the maximum amount of your line—and as you make payments, you generally gain access back to those funds. Thus, a line of credit gives you unmatched flexibility.
So what’s the main difference between a law firm line of credit and a bank line of credit?
The credit limit.
Banks generally only value your hard assets as collateral, like your property, cash and equipment, which restricts the amount of financing they can provide you. Specialty lenders on the other hand also value your legal fees as collateral (both earned and unearned), which means the maximum amount of your line of credit can far exceed that of a bank line. Plus, since these lenders focus on lending to law firms, they understand the nature of your practice and generally will structure your payment schedule to match when you anticipate receiving fees.
- Post-Settlement Loans
A post-settlement loan is exactly what it sounds like—a loan against your anticipated fees from a settled lawsuit. The interest rate is usually similar to a line of credit, but normally considerably lower than a case advance.
Unlike a line of credit, in this type of transaction you typically receive the funds as a lump sum. You pay back the lender as you receive your fees instead of being responsible for monthly payments.
Further, most post-settlement lenders only ask you to put up your fees from the case as collateral for the loan, so there isn’t a lien on all of your firm’s assets—just the fees from that specific case.
- Non-Recourse Advances
Non-recourse advances can be obtained pre-settlement and post-settlement and are generally considered an asset purchase, sale or assignment versus a loan.
With a standard non-recourse advance, you receive a lump sum payment while your client’s claim is ongoing or while you await payment if the case has settled. In return, the funder buys a portion of your anticipated legal fees from the lawsuit. When you receive your fees you repay the funder the amount that was advanced, plus an often significant rate of return.
With most (if not all) non-recourse advances, you don’t pay back the funder unless you receive fees from the case. There are two major concerns with non-recourse advances. The first is cost—it is not uncommon for lenders to expect a return of two to three times the original investment due the risk involved. The second is availability—there are only a limited number of lenders that are willing to provide case advances on a non-recourse basis, particularly on a single case. As a result, you may have a difficult time finding a lender willing to fund your cases.
The truth is that each type of financing option has its pros and cons. However, the huge advantage of choosing a finance company focused on funding plaintiffs’ firms is that you get a company that will fully appreciate the nature of your business and, as a result, be more willing to accommodate your needs.
The following article is part of a collaborative educational blog series, Finance Corner: A Guide for Plaintiffs' Attorneys and their Clients. If you are interested in receiving similar articles, you can subscribe here.
Counsel Financial provides working capital credit lines exclusively for the plaintiffs' bar in all states except California, where credit lines are issued by California Attorney Lending.