Litigation Funding FAQs
Frequently Asked Questions
What is Litigation Funding?
Also known as Litigation Finance or third-party funding, Litigation Funding is a mechanism that provides specialized/strategic capital to law firms, taking the form of a loan against attorney fees. It is often used to fund ongoing legal projects, but can also be used to support business objectives such as rapid growth, operational efficiency, and marketing and branding.
What is the purpose of this type of funding?
Litigation funding helps level the playing field. It can allow smaller law firms to expand their capabilities or have the option to take on complex, long-term cases against larger firms or defendants with extensive resources. Through litigation funding, the firm can draw on more resources to better represent its clients.
What are the benefits?
The benefits of Litigation Funding are manyfold. In legal cases, it can provide more resources for research and discovery, or to hire the best experts in a given field. For the firm, it can fuel expansion, diversification, and hiring. The capital infusion provided by litigation funding has allowed some of our client firms to achieve tremendous growth in a shorter amount of time.
What types of cases are usually served by litigation funding?
The types of cases are varied, it can include single event cases, cases with contingency fees, hourly billable cases, or hybrid cases such as class actions, mass torts, mass actions, commercial litigation, environmental, employment law, and intellectual property.
When should a law firm think about litigation funding?
The decision to avail of litigation funding depends on the needs of the firm. At the end of the day, a law firm is a business, and it requires thoughtful planning and investing. Litigation Funding can be a tool used at the appropriate time to achieve the firm’s short-term objectives or long-term business goals.
Can an attorney or partner of a law firm apply independently for Litigation Funding?
No. An individual cannot apply for litigation funding. The law firm must be the entity that does the borrowing, using its cases as assets.
What are the requirements to apply for this type of funding?
Any law firm with a solid business plan can apply. Requirements include an active bar license, being in business for at least three years, an established record of acquiring and resolving cases, and active cases that can be put up as collateral. Supporting data such as tax returns may also be requested.
What is Leveraging?
In this context, leveraging is using an existing docket of cases as the primary collateral. Unlike other types of loans, which can require pledging a variety of assets, litigation funding will only consider the cases put up as collateral to determine the approval of the loan.
How long does it take for funding to be approved?
Approval can depend on the complexity of the deal and the size of the transaction. It typically can take up to 30 days, but some of our approvals have taken just seven days.
What is the underwriting process for this type of loan?
Our underwriting process usually entails gathering case data, tax returns, law firm formation documents, and other due diligence to support the loan request. We then collate this into a format the lending fund requires. Once submitted, it can take 2-3 weeks for the lenders to underwrite their terms before they can make an offer and present their terms. The overall process can take about 30 days.
In general, what are the terms of this type of loan?
The terms for litigation funding are unique to each transaction. Once underwriting is completed, the lending fund will issue a term sheet that has the loan amount they are willing to fund, along with the interest rate, repayment schedule, origination fee, and any specific covenants for that loan.
What is the difference between Recourse Funding versus Non-Recourse Funding?
The difference is the personal guarantee. Recourse funding requires the borrower to pay the loan back no matter the outcome of the case. Non-Recourse funding means that the repayment of the loan will depend on the outcome of the cases set as collateral. Recourse funding tends to have more favorable terms as it is guaranteed, and lending funds usually encumber a diverse portfolio of cases so as to minimize risk. Loans are also usually only a small percentage of total legal fees, making it easier for borrowers to pay it back within the terms of the loan.
What is the Personal Guarantee?
The personal guarantee is used in Recourse Funding. This guarantee allows the rates of Recourse funding to be more favorable, while in Non-Recourse, the lenders take on more risk, requiring a higher cost of capital. The guarantee in Non-Recourse funding is only triggered in the event the firm gets paid but fails to pay back the loan.
What is Pre-Settlement Funding and Post-Settlement Funding?
Both are under the umbrella of litigation funding, using the same underwriting process but with different interest rates. Pre-Settlement financing is the loan given to the law firm before the collateral cases resolve. This is typically used to fund ongoing cases and rates are usually higher. Post-Settlement funding is when the collateral cases are already resolved, and the firm uses them as assets for capital infusion. The rates are generally lower and often used to fund business growth.
How can the Law Firm determine the amount to loan?
The firm in consultation with us determines the loan amount. While there are no limit restrictions, ideally, the objective is not to overfund the firm but to borrow only what is necessary or needed. The firm’s borrowing power is assessed based on its financial record, current costs, case inventory, future goals, and long-term outlook. Typically, the loan amount is set at 15-40% of their future legal fees.