What are the risks and rewards of financing lawsuit expenses?

May 26, 2022

May 26, 2022

What are the risks and rewards of financing lawsuit expenses?

So, you’ve built up your law firm litigating modest personal injury cases and now—finally—you land that big case that will likely go to trial and propel your law practice to the next level.

You face a critical choice: A) Refer the case to a firm with better resources or B) rise to the challenge—committing to extensive discovery, armies of high-priced experts, high-tech exhibits, and, possibly, a lengthy appeal.  

The expenses involved would give even the most zealous advocate pause.

Your usual practice of advancing case costs with your own money will not work. After all, your firm does not keep that kind of cash liquid. Even if you did, you’re reluctant to tie up firm funds indefinitely, hampering your business plans to grow into more practice areas, secure better advertising and technology, and move into that lux office uptown to accommodate your increasing headcount.

Plus, making a sizable interest-free loan from the firm’s after-tax dollars can create a conflict between your interests and those of your client on every spending decision.  

In anticipation of your landslide verdict, you could of course take out a loan to finance tangible assets such as real estate or office equipment and furniture, but why not instead finance the very expenses that will drive your earnings on the case?

Before discussing any risks, let’s recognize the primary rewards of litigation financing, particularly with LevelEsq’s Lawsuit Cost Financing (LCF):  

  • Leveling the playing field. With funding for your big case, you can proceed in litigation confident that corporate or insurance interests won’t spend you into the ground.  
  • Freeing up cash. By financing new cases, you can keep your capital for your growth plans. For added liquidity, you can refinance expenditures you’ve made on existing cases.

Funding source risks: Disclosures to third parties and unreasonable demands

Banks and other lenders offer funding. So, too, do investors such as hedge funds through an intermediary. Non-recourse funding, usually offered by investors, may later need to be disclosed. Recourse loans may also be discoverable, since banks file financing statements that record loans they’ve made.  

Banks also may obligate you to buy life insurance for their benefit, provide additional personal collateral, demand exclusive depository relationships for your firm’s operating and trust accounts, and reserve the right in a default to levy on your firm’s operating account.  

LCF reward: No disclosures or burdensome conditions

As a case-specific line of credit, LCF is not subject to rules requiring disclosure of non-recourse litigation funding information to courts or the defense. Unlike a traditional bank, LevelEsq does not require firms to do things like end relationships with banks or other lenders, purchase life insurance, or provide extra collateral.  

Application process risks: Scrutiny and more demands

Lenders will evaluate the creditworthiness of both the firm and any guarantors—usually, partners or shareholders—to determine interest rates and may require as collateral things like a security interest in firm assets, including fees due from clients, or a deed of trust in guarantor or firm-owned real estate.

Underwriting could be lengthy and involve accessing all non-privileged firm records, including billing information. Frequent audits of the firm’s accounting could span the life of the loan, creating an added workload that distracts from your trial preparation.  

Lenders could also demand seemingly benign non-economic covenants requiring your firm to, say, keep a minimum amount of cash on hand, maintain liability and worker’s compensation insurance policies, and pay office rent timely. Breaching a covenant during the loan, however, could trigger default or penalty rates, compounding of interest, or the lender calling the loan due.

LCF reward: Fast underwriting and easy access to funds

With LCF, you choose which cases to finance and the amount you will need for each case. Complete a simple, automated application in minutes and receive a financing offer within hours. Request funds as needed any time of day through our online customer portal and receive the funds typically the next day.

Repayment risks: Unreasonable or unclear terms

Litigation funding interest rates are notoriously high and often exempt from usury protections.  

Non-recourse funders don’t require repayment of money advanced in unsuccessful cases but may expect exorbitant compensation after a trial win or settlement.  

Be sure to understand the details of the repayment structure and debt service—the sum of interest and principal you’ll pay over the full course of the loan—and the impact of a default, an unfavorable (dismissal or trial loss) result, or another attorney taking over the case.  

Some lenders require full interest paid before paying down the principal, while others amortize, applying payments to both principal and interest. Know that higher interest rates, even on amortized loans, prolong principal repayment.  

Watch out for compounding interest—which gets added to the principal, regardless of whether the loan is current, penalties for missed payments in addition to interest, and other incidental fees, such as origination fees, commissions to loan brokers, and fees for third party expenses, including premiums for your life insurance for the lender’s benefit and payments to outside attorneys and accountants.  

LCF reward: Transparent, competitive rates and flexible repayment schedule

Interest, at rates beginning as low as 0.7% per month, accrues only when there is an outstanding balance on the account. You may choose to pay only interest for the first 18-24 months. If you make a payment greater than the interest accrued during the interest-only period, LevelEsq applies the amount to the principal balance. Need to adjust the interest-only period to align with the length of your case? LevelEsq can negotiate with you.  

Default risks: Financial and reputational loss

Default could entitle lenders to add accrued interest to the principal and further increase interest. At worst, default could mean the lender foreclosing on the receivables, demanding the clients pay their outstanding balances to the lender rather than the firm, filing a—public, embarrassing—collection action, and suing the guarantors or foreclosing on their real property collateral.  

LCF reward: Litigation Cost Protection  

Available only from LevelEsq, Litigation Cost Protection is a unique insurance policy that pays the principal balance of your case cost loan back in the event of a trial loss. If you apply for LCF on a case within the first 120 days after service of process, LevelEsq will include a Litigation Cost Protection insurance policy with your loan. With Litigation Cost Protection, you can expect peace of mind and a straightforward, hassle-free claims process.  

Built by and for plaintiffs’ attorneys, LevelEsq engineered its solutions to facilitate funding your big cases and mitigate the financial risk to your firm. Let us support you as you reap some rewards in your quest to take your firm to the next level.  

How can we help your firm?

Lawsuit Cost Financing

Quick and seamless access to capital to fund your case expenses.

Litigation Cost Protection

Protect the downside with insurance coverage for litigation costs.