A contingency fee attorney does not lead an easy life. This is a fact.
Unlike their billable hour counterparts, contingency fee attorneys don’t start off with plenty of cash, and there’s no guarantee they’ll end up with it either. That’s the whole basis of the term “contingency” – this noble, self-sacrificing purveyor of justice forgoes any form of payment unless the case in question ends favorably for the client.
Of course, a favorable trial outcome does not ensure payment. As with all institutions, the court system is rife with built-in bureaucratic processes, many of which result in procedural delays and stoppages. These stoppages can have profound effects on settlement and verdict payouts, causing delays of a few months to a few years.
Let’s not forget the enumerable hours of discovery and preparation that occur before verdict or settlement can even be considered; the witnesses and experts that all must be consulted; travel and lodging and all other assorted tasks associated with setting up a successful case. All of these things must be budgeted and paid for by none other than the attorney or her small firm.
And let’s keep in mind that an attorney without proper funds has to waste time trying to acquire a stable cash flow, when that time could be spent preparing for the next big case.
You might say it’s a lifestyle of “all work, no pay.”
You might, but the truth is, plenty of contingency fee attorneys are doing just fine. They have lucrative practices in which they represent – and win for – countless clients each year, and they do so without taking a break and without breaking the bank.
What keeps these successful attorneys afloat?
The Secret of The Super-Attorney
All successful attorneys recognize one simple fact: in order to make money, you need to have money. This one sounds like a no-brainer, right?
Consider the example we looked at earlier:
- Contingency fee attorneys need to invest in discovery tools, travel expenses, and day-to-day finances in order to try a single case.
- Those expenses can add up to the thousands or ten thousands.
- This case may not see a full return on investment.
Now imagine how many cases a contingency fee firm might try within a month, or a year, or a decade. The dollars add up.
So we know that running a successful legal practice requires money. But where does this money come from? Well, that depends on where you look.
The easiest solution is relatively rare for your average attorney: this would be a large, personal cash reserve. If a single case doesn’t pan out, not all hope is lost, because the bank is still relatively full, and hopefully the next case will bring in the bucks. Sounds good!
Of course, not all attorneys necessarily hit it big on Wall Street or in Vegas (or otherwise experience some remarkable bank-filling event) prior to opening a law practice.
What about the super-attorneys with average bank accounts? How do they maintain a steady cash flow?
One option here would be pursuing some sort of traditional funding, such as a loan or a line of credit. Both of these options, the former of which is granted in a single lump sum and the latter of which can be paid out in installments over a prescribed amount of time, are available through banks and lending institutions. Interest can vary depending on the loan amount and the agreed upon repayment schedule, as to be expected in any lending agreement. There’s nothing not to like about this arrangement.
Except for the fact that it is incredibly difficult for an attorney to be approved for a traditional loan or a line of credit.
Credit lines and personal loans typically require some form of collateral in order to be considered secure, which can pose a problem for many attorneys. Collateral, as accepted by most banks and lending institutions, is a physical piece of property – a car, a house, a 4,000-year-old diamond from Peru.
Contingency fee attorneys, many of whom are already strapped for cash, often do not own forms of collateral that would be accepted by a bank. For example, while an office could be used as collateral, many contingency fee attorneys share or rent office space, which would disqualify that office as collateral.
Without collateral, it’s nearly impossible to secure a loan.
Fortunately, there’s more to life than loans.
A Case Full Of Cash
Attorneys may not have the physical collateral needed for loans or lines of credit, but they do have a unique form of collateral that can grant them access to a super-unique, super-effective form of financing – legal funding – that was specifically designed for attorneys.
Unlike most other business owners, attorneys have the ability to use their legal receivables, all of which have potential future value, as non-physical collateral. This means that a single specific case, an entire caseload, or the value of an entire law firm can be considered collateral.
For example: a bicycle accident case might have an expected payout of $1.3 million in damages; a medical malpractice class action might have an expected payout of $400 million; a slip and fall might have an expected payout of $580,000. The expected value of each case, or an entire grouping of cases, is viewed as collateral.
Because an attorney’s collateral, in the form of legal receivables, can exist in a variety of forms, legal funding has also been developed to exist in a variety of forms.
For example, a lawsuit can have five or more identities.
- Early, research-and-discovery form;
- During prosecution;
- After a settlement agreement has been reached;
- During an appeals process;
- After a judgment has been reached.
Each of these different iterations of a case can be financed with a different type of legal funding, none of which require physical collateral.
The fact that legal funding firms accept legal receivables as collateral sets them apart from traditional lenders. That’s a pretty big deal for attorneys, who often struggle to meet the harsh standards of banks and lending institutions.
Many Legal Funding Transactions are Advances, Not Loans
To put it in the most basic terms, legal funding is simply the factoring of legal receivables. Legal finance firms take the collateral into account – the legal receivables – and purchase an amount of the projected case outcome, which for the attorney typically means the projected case fee. The legal funding firm can then advance this purchased amount to the attorney in question.
Repayment rates vary based on whether the funding is pre-settlement, post-settlement, appeals, or judgment / verdict.
To clarify the concept, legal funding firms make an investment in legal cases. They do this by purchasing a portion of projected earnings of the firm or case, and advance this portion – now owned by the legal funding firm – back to the attorney or law firm. Successful cases result in a monetary gain for both the attorney and the legal funding firm. Often, legal funding firms do not demand repayment in the event of an unsuccessful case.
So let’s say you’ve just settled a case for $6 million but don’t expect to see your fees for another year due to processing delays. You figure you might as well try out this legal funding thing and see what happens.
- Using a type of post-settlement funding called fee acceleration, you receive a portion of your fee up-front.
- You have the capital to invest in a new case that just came across your desk (without the advance, you’d have had to pass it up).
- You have no worries about everyday life. Your advance allows you to continue paying your bills, your mortgage, and your office fees.
- As expected, your fee is paid about a year later. Because you only sold a portion of your fee to the legal funding firm, the rest of the fee is all yours, except for the amount you use to pay off the discount rate of the advance.
As a refresher, traditional lenders dish out a lump sum or series of payments over a period of time and then ask for repayment with interest at a later date. These lenders require physical collateral, which makes a successful loan application difficult for many contingency fee attorneys.
That’s Why Funding Is Fundamental!
Now you know the real secret to the super-attorney’s success. A constant cash flow means that there’s plenty of time to get everything done, and legal funding is a great way to ensure a constant cash flow.
Have a super legal funding success story to share? We love to hear those! Leave a note in the comments!
Photo Credit: Figures of Justice by Scott Robinson
Shayna Keyles has been keeping the world informed on the latest in law and litigation finance with RD Legal Funding, LLC since 2012. She offers writing and content marketing tips at her website, http://www.contentliaison.com, and tweets at http://twitter.com/skliaison.