Law Firm Funding: A Cash Flow Management Solution for Plaintiff Attorneys
Today's plaintiff attorneys face a unique set of financial challenges, especially given the current volatile economy. Working on a contingency basis, they typically incur hefty expenses long before collecting their fee. Discovery costs, salaries, expert witness fees, advertising costs, and day-to-day operating expenses can add up quickly, making it difficult to compete with deep pocketed defense firms.
Unfortunately, the plaintiff attorney working on a contingency basis must wait for the case to settle before receiving payment, which can often take years. Furthermore, even once the case has settled, it can take several additional months and in some cases several additional years, before payment is actually received.
There are several reasons for this delay in payment. Defendants, especially large insurance companies, are often slow to pay. In addition, there are sometimes administrative delays that are often coupled with sluggish court approvals.
This is where law firm funding can be a lifesaver for the plaintiff attorney. There are two major classifications of legal financing: pre-settlement funding and post-settlement funding. Pre-settlement funding is a cash advance on a case before the case settles. This is the most common kind of law firm funding.
With a pre-settlement advance, the risk to the funding company is relatively high. Therefore, the rates are quite expensive, usually exceeding 3% per month. In addition, many finance companies will charge a flat upfront fee of 10%-20% of the advance.
Pre-settlement funding becomes very costly when a case takes over a year to settle, as the high monthly interest rate compounds over the course that the funds are outstanding. The amount of the advance usually will not exceed 10% of the estimated case value.
Post-settlement funding involves a finance company purchasing the fee after the case has settled. The attorney receives an advance based on a discounted value of the determined legal fee. This is also referred to as legal receivable factoring.
Rates for post-settlement funding are generally much cheaper, as there is no pre-settlement risk. Legal funding companies usually charge anywhere between 1.5% and 2.5% for advancements on settled cases.
If a lawyer is facing financial difficulties, attorney funding can help to smooth out irregular cash flow. Pre-settlement funding is quite expensive and should only be used when other financial options have been exhausted. Post-settlement financing can be obtained at a much cheaper price and can therefore be utilized as a cash flow management tool on a more regular basis.
David Smethie is the Deal Origination Manager at RD Legal Funding, LLC, a law firm funding company located in Northern New Jersey.