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What is Legal Financing?

Terry Masters
Terry Masters

Legal financing can refer either to loans obtained to support a professional practice of law in its entirety or to support the expenses surrounding a case taken on contingency. The term is sometimes applied to third party funding provided as an advance to a plaintiff in a civil case pending the settlement of a lawsuit. Some third party loans go to the attorneys and are analogous to business loans, and others are non-recourse advances awarded directly to the plaintiffs that is contingent on an expected future award. With some exceptions, the term is most often applied to attorney practice financing, however, and lawsuit funding or legal funding is most often applied to plaintiff pre-settlement advances.

Law firms operate in the same way as any other business. Like any business, a legal practice can seek funds to finance operations from any source, such as a bank, a loan company, or a third party lender. As a basic matter, legal financing is any business loan that supports the firm’s general operations.

One type of legal funding is commonly known as a lawsuit loan.
One type of legal funding is commonly known as a lawsuit loan.

Certain law firms also take cases on contingency. A case taken on contingency obligates the firm to front the expenses of prosecuting a civil case with the hope that the firm will be reimbursed from a successful settlement at the end of the proceedings. If the firm loses the case, however, it loses the money invested on contingency.

The prosecution of a case on contingency is expensive to the law firm. Salaries must be paid to lawyers assigned to the case and expenses for case management, investigation, discovery, and expert witnesses must be covered in advance. Third party legal financing can fund operation of a specific case or all of a firm’s contingent litigation. The lender assesses the value and likelihood of success of the outstanding cases and make a funding determination based on that evaluation. This sort of arrangement is a bit like receivables funding of businesses with tangible products.

A law firm can also seek legal financing of settlements. There is often a significant length of time between when a settlement or judgment is reached in a case and the time when the money is actually collected. The wait time can encompass years before the case exhausts its appeals and the losing party finally sends payment. A lender can provide a loan based on the outstanding settlements that will help a firm bridge the time from award to receipt.

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    • One type of legal funding is commonly known as a lawsuit loan.
      By: Andy Dean
      One type of legal funding is commonly known as a lawsuit loan.