Legal Finance is a rapidly growing field that is being adopted by mainstream investors for the yields it can offer. To many investors, legal finance offers the potential for higher yields and a chance to diversify their portfolios outside of traditional asset classes. But investors are not the only ones who can reap the benefits of legal finance. Lending to a plaintiff or a law firm can facilitate a fair outcome for a lawsuit by giving plaintiffs the financial staying power to pursue a reasonable settlement. Likewise, law firms can use law firm funding to increase their capacity for taking on cases. The rise of litigation funding can be tied to the benefits that it can provide for both the borrower and investor. Below we take a look at how the different parties come into play.
In pre-settlement funding, money often acts as a tool to allow receiving parties to be entitled to their fair day in court by providing them funds for day-to-day needs while a settlement is pursued. The funding is non-recourse loan, and plaintiffs do not have to repay unless they win their settlement. In cases where the plaintiff was injured on the job, or in an accident, litigation funding often provides the lifeline financial support a plaintiff needs to keep paying medical bills and living expenses like rent and food. In other cases, small business owners who are being sued by a bigger player would not be able to continue operating without the support of legal finance. The financial security that litigation financing provides gives plaintiffs the power to pursue a settlement against a large company. In this sense, litigation funding can help parties pursue justice.
Law firm funding is a different type of litigation financing that can help law firms maintain operational expenses and ease plaintiff recruiting for mass cases. Attorneys within law firms frequently work on a contingency fee basis, meaning that they don’t receive payment until the case has settled or been adjudicated. These trial attorneys represent worthy mass tort and class action cases, often for a number of years, before they receive payment. In cases such as these, law firm financing allows trial attorneys to continue their work without putting further financial strain on the firm. In other cases, law firms need to recruit plaintiffs for a mass case. Rather than pay for advertising out of pocket, law firms can apply for funding and recoup their expenses when cases settle or are adjudicated.
Law firm funding is a popular way for firms to create additional cash flow and allow them to increase their working capacity. A 2017 Lake Whillans study found that 84.29% of litigators who used funding in the past answered that they would use it again.
Investors are often the most engaged in this field, as legal finance portfolios offer a chance to diversify their investments without sacrificing potentially attractive yields. In plaintiff loans and law firm loans, investors are able to earn potentially attractive yields in an alternative asset class that generally behaves independently of the stock market. Plus, with originators creating cross-collateralized portfolios designed to reduce exposure in any geographic area, case type, and size, investors are not only diversified from the stock market, investments are diversified within the field as well.
It should come as no surprise that legal finance has grown exponentially in the past few years and is going mainstream. Though the field was once relatively unknown, understanding how different parties get involved in deals and benefit from the funding has led to more investors entering the space. Investors can also take a sense of pride in knowing that their investment is helping to make a positive impact in the lives of plaintiffs and litigators pursuing justice.
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