It’s common for small firms to obtain some financing from a bank. Typically, this is in the form of a line of credit. However, there are limitations in bank loans and firms may not be able to get all of the funding they need to run their practice. This is particularly true for contingency fee firms who have irregular cash flow. That’s where post-settlement funding can help.
Credit lines provide financing for a law firm secured and collateralized by the firm’s assets. Often the moneys also must be secured by the principals’ personal assets as well as by the personal guarantees of the principals. Funding amounts are usually limited. In addition, because a UCC financing statement is almost always recorded, it inhibits other types of financing since all assets are collateralized. The personal guarantee of the firm owners can also trigger the filing of a UCC lien against the principals personally.
Post-settlement funding only involves a particular case or cases. It is an asset purchase and not a loan and therefore there is no monthly interest due. The law firm acts as the funder’s escrow agent and fiduciary and transfers the portion of the firm’s fee that the funder purchased when the firm’s fee is received. Accordingly, payment to the funder is only due when the settlement is paid, and the amount paid consists of the increased value – or “earned discount” on the amount received.
An existing credit line doesn’t necessarily rule out also getting post-settlement funding. Where a bank has a lien against the firm for a small line of credit, the funding company will need the bank to provide a subordination or inter-creditor agreement on the settled case that is being funded giving the funding company priority. A reputable funder will be familiar with the process for working with the bank to allow the sale of the legal fee on a particular case.
When applying for funding, the law firm should submit all necessary financial information in order to expedite the process.
If you need funding for your law firm, learn more about how we can help or contact Sherry Foley, Esq. at sfoley@rapidfunds.com for a consultation.