Your firm is on the move, and in order to continue the momentum, you’ve decided that you’re ready for legal financing. But how do you know what type of financing is best for your firm—recourse or non-recourse funding?
Looking at your firm’s main objectives can help you find the answer.
Are you trying to reduce your personal risk?
With non-recourse legal funding, you only have to repay the funder from the pledged collateral, such as proceeds of a specific case. This means that if your case is lost and no fees are recovered, then you don’t owe the funder anything.
Alternatively, with recourse funding, such as a business line of credit, you are personally responsible for full repayment. In the event of a default, if the collateral securing your recourse financing is insufficient to cover the amount you borrowed plus interest and fees, then your lender can pursue other means of collection on the debt.
Therefore, for plaintiffs’ firms looking to reduce their personal risk, pursuing a non-recourse advance may seem like a no-brainer. However, non-recourse case funding is significantly more expensive than recourse financing, and the amount of funding you can receive considerably limited in comparison to what you can obtain with a line of credit or loan. As such, it’s important to look at other factors too.
Do you want a lower rate?
Pricing varies greatly not only from product to product, but also from case to case. Typically, the greater the risk is to the lender, the higher the costs of funds are for you. This is why non-recourse funding is oftentimes cost-prohibitive in comparison to recourse funding.
Legal recourse funding is generally structured as a loan based on specific case collateral or a line of credit based on a portfolio of collateral. Typically, the former requires full repayment on the loan and all accrued interest once the pledged cases have resolved, whether or not the results were favorable; the latter requires monthly payments based on the amount that you draw from the line and offers more flexibility in tailoring the terms to fit your firm’s needs.
While non-recourse legal funding can also be structured as a loan, it is customarily structured as an asset purchase where the lender purchases a portion of the expected legal fees from a specific case. However, due to the high level of risk the lender takes on, the premium you pay for a non-recourse loan is significant—much higher than the original investment. In addition, obtaining non-recourse funding presents another obstacle. You generally need to have a large portion of the collateral in advance stages (such as post-settlement) in order to qualify for this type of lending. It is beneficial to analyze the cost for the expected life of your case.
Is your need long or short-term?
Another factor you should consider when assessing your financing options is whether this is a one-time need, for example to cover case expenses, or whether your firm is going to continue to have a financing need, such as covering operating costs, marketing or recurring case expenses, as may occur while litigating mass torts and class actions.
If you are looking for funds to satisfy an immediate need, a case-specific advance or loan may be the right choice for your firm. This gives you the opportunity to turn your future receivables into immediate cash-on-hand.
If you have a financial need that is ongoing, then case-specific funding may not be sufficient. In this instance, you should consider whether a traditional bank loan or a line of credit from a law firm lender is the better option to meet your needs.
Regardless of the type of financing you choose, planning ahead is crucial to the financial health of your firm. Analyzing the risks and benefits of all financing options available to you will help you choose the right solution for your unique situation.
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.
