Making the decision to obtain financing—a line of credit, term loan, non-recourse advance, or some variation thereof—is a big step for most plaintiff attorneys.) Often the determination isn’t made on a whim, but rather is a product of research and planning.
Similarly, a lender’s decision to provide financing to your contingent fee practice generally requires several hours of inquiry and investigation—a process commonly referred to as due diligence.
Due diligence ensures a funder that your firm is suitable for financing and can perform under the agreement. Below are a few of the most common due diligence requests and some tips on how you can help the process go as smoothly as possible.
- Examining Your Legal & Financial History
Typically, funders first want to get a general understanding of your financial background. Questions such as, have you ever filed for bankruptcy, do you have any open and unpaid tax liens, or do you have any active liens filed against you or your firm, all generally make the list.
Funders next will search for litigations filed against you and your firm. For example, they’ll want to know if other creditors have pursued collections against you or your firm, or if there is a pattern of defaulting on obligations with vendors or co-counsel.
Tip: play offense, not defense.
If the answer to any of the above is “yes” or if you have other “red flags,” the best thing you can do is acknowledge and disclose the issues before they’re identified as a problem by your funder. Explaining a bump in your financial history before its discovered puts you in the best possible position because it means you get to drive the narrative of your own story.
Remember, underwriters are humans too—they understand that people and their circumstances can change. However, it’s easier to explain imperfections in your history rather than let the financing company make assumptions about what happened.
- Reviewing Your Firm’s Cases
When you apply for litigation funding, it’s assumed that the funder will want to take a look at your current caseload in order to project your current and future revenues, as well as determine the value of the collateral that is going to secure the financing.
Tip: have your case list organized with the caption, docket number and jurisdiction (if filed), as well as the projected settlement value for each case and the fees you believe your firm will receive, prior to supplying the funder the case list. While the financing company will want to conduct their own analysis of value and verify docket information through state and federal websites, you’ll quicken the process and improve your credibility by providing accurate information at the outset.
- Analyzing Your Current Budget
In all likelihood, your lender is going to want to construct a plan as to how you will utilize the financing you are requesting. Equally as important, they’ll want to take a look at how you’re currently deploying capital. Is the vast majority of your spending allocated to cases expenses, firm overhead or portfolio building?
Having a bird’s eye view of your current cash flow will give your funder a good idea of what modifications they’ll want to see made once you’ve received the capital, and will help them help you along the way.
Tip: knowing where you are now, and where you want to go will help get everyone on the same page
All reputable financing companies are going to require a due diligence process, but the depth and degree of each can very widely amongst funders. The best way to approach any due diligence investigation is to comply as best as you can with requests made, disclose anything that can hurt your firm’s chance of getting financing upfront and be sure to present yourself and your firm in the best possible light.