Credit Lines vs Post-Settlement Funding: Which One is Right for Your Law Firm?
Contingent fee law firms often seek financing because of their irregular cash flow. They may wait long periods of time to receive settlement funds; meanwhile there are bills that need to be paid. Two funding options that these firms use are credit lines and post-settlement funding. Each has its advantages and disadvantages so before seeking funding, attorneys should understand the differences between the two options:
Credit lines provide financing for a law firm secured and collateralized by the firm’s assets. Often the moneys also have to 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.
Interest is payable monthly regardless of the firm’s cash flow. Also when a case settles, generally a percentage of the fee must be used to pay down principal. Recourse in the event of default is to the firm’s assets and all 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. A reputable funder will ensure that a firm knows the purchase price of the case before committing to the funding and throughout the length of the transaction. There should be no hidden charges with a reputable funder.
Although a UCC financing statement may be recorded, it is only against the case fee acquired and not against all assets and therefore does not prevent future financings against other fees generated. There is no personal guaranty since it is not a loan and the lawyer only guarantees that he or she will not convert the funder’s assets (known as a “bad boy” guarantee). Post-settlement funding is non-recourse meaning if for some reason the underlying obligor on the fee does not pay, there is no recourse to the lawyer or firm. Nothing is owed!
Rolling Line of Credit
A rolling line of credit is a new option for law firms. It provides for the flexibility of a traditional line of credit with additional capital for post-settlement funding. In a rolling line, the firm’s assets are collateralized and guaranteed, but when the lawyer wants post-settlement funding for a particular case, he can roll part of his line of credit into the post-settlement funding and get additional capital thus increasing cash flow and reducing monthly interest payments.
If you have questions about what type of funding is right for your law firm, contact us for a consultation.