Anyone can attest to the fact that, in general, hiring a lawyer to handle your ongoing litigation isn’t cheap. However, almost no one mentions how much it costs that law firm to keep its head above water throughout the case and still keep the lights on.
Whether it involves a new legal practice or a long-time firm that’s highly reputable among its peers, you’ll need financing from a bank or legal funding partner. It not only helps with cash flow but also makes it possible to aim higher for the business as it builds momentum. No firm can put their money into marketing and get their name out there via billboards, social media, or radio ads with limited funds.
Has your firm put marketing efforts on the back burner? Are things stagnating in terms of much-needed hiring or client intake processes? To keep up with revenue-generating activities, law firms need to outsource their financial options.
Read on to learn how finding the right partner for legal funding endeavors could significantly impact the way you operate, litigate, and promulgate your contributions to the world.
What Is a Law Firm Financing Partner?
Shouldn’t all the money a law firm generates be available for resources, paying your lawyers for their hard work, and pursuing the lofty goals every business needs? The last thing you want is to bury funds under mountains of litigation. It could sink your firm, not to mention your motivation.
Litigation funding provides you with funds for case-related costs, such as:
- E-discovery fees
- Expert witnesses
- Disbursements
How Legal Funding Differs From a Bank’s Type of Loan
With legal funding solutions, your firm will receive a non-recourse loan that banks can’t usually offer due to the high risk factor. Unlike recourse loans, which allow a lender to go after a defaulting borrower’s assets, non-recourse loans will only seize the collateral you put up.
For legal funding partners, this “collateral” is the future settlement proceeds (paid on a contingency fee basis). In other words, you’re pledging money you don’t yet have to your partner in legal funding and forcing them to take a chance on you.
What if your case never gets that money you’re hoping for? If you lose the case, which means you lose the proposed collateral, a reputable legal funding partner just wipes out the debt. You don’t have to pay the loan back.
Of course, you can see why it’s imperative to have exemplary credit when seeking legal funding. Without it, the lender may charge higher interest rates to compensate.
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The Benefits of Having a Funding Partner (Besides the Available Funds)
As an attorney, it’s not only your job to take care of your practice but also your clients. It’s surprisingly common that clients facing long periods of grueling litigation can’t fit work in or aren’t eligible to work at the company they’re now getting you to sue. What if the client needs help with their expenses, from transportation and food costs to utilities and medical bills?
It’s largely illegal for attorneys to financially assist clients. Those same attorneys also don’t want their clients to accept early settlements just to curb their litigation costs. Sometimes, the solution is to introduce clients to a funding partner for the same benefits firms receive.
The upside of this arrangement is that those attorneys get more time to study and work on the case for a better chance at a successful case (and being able to repay their funding partner!). Everybody wins.
The Traditional Financing Methods
Wouldn’t a more traditional law firm financing partner be a better option? Many firms believe legal funding practices may mean the partner interferes with the case or charge outrageous interest rates. While that’s off the mark, it’s true that traditional financing options are well-established and can relieve the financial pressures of a lengthy litigation.
Examples of these financing channels include the following:
Bank Loans
Bank loans are popular with law firms, but the long-winded approval process can leave your business without the capital it needs to run. Is it still worth pursuing if you end up paying out of pocket to keep the client’s case going and then have to start repaying the principal and interest portions immediately (whether you win or lose the case)? You’ll also need physical collateral that you already own to take out a loan.
Cash Flow
Inflowing cash, such as proceeds from startup loans, must fund any outflow, which can be anything from attorney and secretary payrolls to office or client-related expenses. If litigation is your sole source of finance, there may be times when your budget tightens and you have to make sacrifices, such as:
- Lay off lawyers
- Halt the hiring process
- Reduce advertising efforts, giving your competitors an edge
Finding money elsewhere comes in handy, then.
Personal Cash
Another option law firms might consider is using a partner’s own funds rather than third-party financial assistance like a legal funding partner. You may not flinch at the thought of using your cash savings to support your law firm or borrow money on your personal assets if you need a little more. Some individuals will even take out home equity loans and dip into their retirement funds, but with no guarantee that the firm will win the case, losing the funds invested in this litigation becomes a real possibility.
You, as the lending partner, may also face tax implications that can get quite complicated.
Revenue-Based Financing
Revenue-based financing works more similarly to an attorney funding collaboration since you promise a cut of your future revenue to the investors in return for present-day funds. Before signing your agreement to raise this capital, you decide on a revenue percentage to pay at the end of every litigation until you repay the original investment. While some lenders stick to a predetermined monthly payment amount, giving you very little leeway, more flexible options base amounts on the respective month’s cash flow.
With either option, your law firm must pay back the investment whether or not you win your case, unlike with a legal funding partner.
Line of Credit
Using a line of credit is another available option if you don’t want a legal funding ally for legal cases. A line of credit is a form of revolving credit—you (the borrower) can borrow funds, pay them back, and then withdraw funds again as needed. Like a credit card, a LOC gives your firm the freedom to withdraw money up to a set limit using two options: secured and unsecured.
- A secured line of credit, such as mortgages and car loans, needs backup collateral that the lender seizes if you default on any payments.
- An unsecured line of credit like credit cards do not require this backing. You’ll jump through a few more hoops during the approval process, get a lower credit limit, and pay more interest.
Other Types of Loans Available
Do the loan models above seem tedious? Your firm could also consider any of the following types of loans:
- Working capital loans: For everyday expenses and short-term operational needs.
- Small Business Administration loans: Gives support from the U.S. Small Business Administration to more easily receive loans from banks or lenders with better terms
- Merchant cash advances: A lump sum of money that’s an advance on future credit card sales or client fees since that money will go to your merchant anyway
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Is Reaching Out to a Funding Partner a Better Plan?
There are a lot of options out there to help your firm pay for litigation-related costs and more, so what should your law firm look for? Let’s say that you decide to use your personal credit card to cover your firm’s business expenses and enjoy a lower interest rate than a business loan would demand. You will have to weigh the fact that this obligation stands, regardless of litigation outcomes—you must meet the monthly minimum amount and may be personally liable if you fail to do so.
Arrangements like this pale in comparison to legal funding when it comes to peace of mind, simplicity, and access to support.
Since law firms prepare ahead of time for litigations, consider adding the task of contacting a legal funding partner before filing a lawsuit or bringing a case to court. If your firm didn’t expect to borrow money in the first place, it’s also acceptable to reach out much later, even right before the trial. These partners understand the unpredictability of prolonged litigation and the often negative outcomes that personal funds cannot cover.
Even if a case ends in your favor, there are appeals. A strategic legal finance partner could help keep the litigation going so that your law firm doesn’t have to succumb to early settlements or lament sinking funds into it over other obligations.
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Your Solid Rock in Legal Funding
Whether you reach out before, during, or after the original case verdict, it’s never too late to receive a partnership for legal financial support. Finding your way through litigation and fighting for the rights of your clients is stressful enough—why add money worries to it? A trusted team backing yours may understand the needs of the plaintiffs, attorneys, and clients you’re responsible for and provide ethical, efficient solutions.
At Rockpoint, our dedicated team provides everything from medical treatment coverage and funds to plaintiffs to supplying lawyers with capital. Unlike many other legal funding partners, we back our clients whether they win or lose and offer one of the fastest application-to-funding workflows in the industry. Call Rockpoint at (855) 591 2489 for trust, transparency, and even back-office financing expertise in Los Angeles, California.
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