Legal financing can refer to loans for law practice or lawsuit expenses. Third-party financing can be provided to plaintiffs or attorneys, and can be non-recourse or commercial. Law firms can seek funds from banks or third-party lenders for general operations or emergency cases. Third-party legal funding can cover the costs of prosecuting a contingency case, and legal settlement financing can bridge the time between settlement and payment.
Legal financing can refer both to loans obtained to support a professional practice of law in its entirety, and to support the expenses related to a lawsuit taken on a contingent basis. The term is sometimes applied to third-party financing provided as an advance to a plaintiff in a civil suit pending settlement of a case. Some third-party loans go to attorneys and are analogous to commercial loans, and others are non-recourse advances made directly to plaintiffs that are contingent on an expected future award. With some exceptions, the term is most often applied to legal practice funding, however, and lawsuit funding or attorney financing is most often applied to plaintiff’s pre-settlement advances.
Law firms operate in the same way as any other business. Like any business, a law firm can seek funds to finance operations from any source, such as a bank, loan company, or third-party lender. In principle, statutory financing is any business loan that supports the general operations of the business.
Some law firms also deal with emergency cases. A lawsuit undertaken in contingency obliges the company to face the costs of prosecuting a civil lawsuit with the hope that the company will be compensated by a positive outcome at the end of the proceedings. If the firm loses the case, however, it loses the money invested in the contingency.
Prosecuting a contingency case is expensive for the law firm. Salaries must be paid to the attorneys assigned to the case, and the costs of case handling, investigation, discovery, and expert hearings must be covered in advance. Third-party legal funding can fund the operation of a specific case or all of a company’s potential litigation. The lender assesses the value and likelihood of success of outstanding cases and determines financing based on that assessment. This type of arrangement is a bit like financing corporate loans with tangible products.
A law firm may also seek legal settlement financing. There is often a significant lag between when a settlement or ruling is reached in a case and when the money is actually collected. The waiting time can be years before the case runs out of appeals and the losing party finally sends payment. A lender can provide a loan based on outstanding settlements that will help a business bridge the time from assignment to receipt.
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