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Imagine this: you’ve been in the legal industry for years, you’ve got cases upon cases to litigate, and your firm is growing by the minute.
Sadly, law school did not teach lawyers the art of legal financing, its do’s and don’ts, or common money pitfalls many lawyers encounter as they develop their careers.
Fortunately, this article will illuminate some classic legal financing mistakes to help you avoid any money problems in your practice.
Legal financing is often the one factor that can level the playing field for plaintiffs and defendants of different financial means. Through securing legal funding, lawyers can fight for longer periods of time on behalf of plaintiffs who are less wealthy than their opponents. When someone applies for legal financing, the company will review the case information, consider the merits of the case and the potential payout after litigation costs, and determine whether the individual is eligible for financing.
While this sounds like a fool-proof solution to financial inequalities, it can be severely damaging to lawyers who fall into the common legal financing pitfalls.
By internalizing these law firm financing tips and avoiding these financing mistakes, you will create the foundation upon which to grow your professional financial success. Let’s dig in!
The reality behind legal financing is that it’s vast, expensive, and diverse in what it offers lawyers and plaintiffs involved in lawsuits. The first step towards understanding how legal financing can help you is to ask yourself this question: What exactly do I need to finance? Some lawyers target their legal funding towards the general day-to-day costs of keeping a firm open. Others, especially litigation-focused attorneys, prefer to direct legal funds at the expenses that come with the vast amount of litigation cases.
Legal financing can cover expenses like general business costs and insurance coverage all the way to attorney’s fees, settlement costs, and other case-related fees. Due to this vast breadth of coverage, it can be useful to pinpoint precisely what you need to fund.
It’s easy to become overwhelmed with all these options, especially as a law firm owner or a relatively new attorney. In fact, most lawyers have already felt this weight on their shoulders of having to grapple with the finances of lawyering.
The solution here is simple: sit down and analyze your needs as a lawyer. For which aspect of litigation do you need financial assistance? How can funding best help you and your firm as a business? This internal analysis will help you narrow down the legal financing services you’ll want to target.
Imagine diving head-first into a huge investment without knowing what you want to gain from it. When it comes to legal financing, that’s a risk you don’t want to take.
Lawyers—and their law firms—naturally have short and long-term financial goals that will inform where, when, and how they want to spend their money and which financing investments they are willing to make.
Let’s be honest. Litigation is expensive! To avoid blindly jumping into the legal financing game, spend some time creating a written financial plan, whether it’s for yourself as an individual attorney, for your practice, or for the client you’re representing.
Analyze questions like this: What is your monthly cashflow? Do you have sufficient savings to take on new cases or make new hires? Do you have short term cases that can sustain the day-to-day expenses of your practice? Are you taking bigger, more lucrative cases to achieve long-term revenue growth goals? Are you leaving any money on the table by focusing too much on either short- or long-term cases that you either can or can’t finance on your own?
Some lawyers choose to focus their efforts on, for example, taking on more cases to help more people. Others perhaps need a narrower focus on revenue growth. If you’re going to spend money on legal financing, you’ll want to make sure that you first have a good idea of your prioritized goals. Once you do so, legal financing will become more efficient in helping you achieve your set target.
The core goal of legal financing is to ensure fair and effective representation of all parties involved, regardless of financial capacity.
If you don’t have a flow of communication with your client, you won’t have all the cards on the table to choose an option that best suits your client’s needs. Similarly, a lack of effective communication between you and your client may result in a missed opportunity for financial support in litigation.
In the end, your client trusts you. Maintaining a healthy interchange of conversation will simply reinforce the team you and your client have built together.
While discussing money can sometimes feel uncomfortable, a straightforward solution to this pitfall simply involves talking. Ask your clients questions. Don’t be afraid to present legal financing as an option to your client, provided they are willing to be open and honest about their financial capacity to undergo litigation.
Effective two-way communication will prevent confusion and ensure you find the best legal financing plan tailored to your client’s needs.
Naturally, lawyers are inclined to be detail oriented. But glossing over the fine print details of a legal financing agreement can result in detrimental costs to the lawyer and the client.
Not every legal financing agreement is the same. Reading the fine print of every unique contract is a straightforward way of avoiding contractual pitfalls.
Check the agreement to ensure you know exactly what costs are or are not covered, how much the company will take as a fee if you win the case, interest rates, interest expense tracking down to the cents, and whether there is a provision safeguarding the confidentiality of the case.
Even if you don’t know the specifics of a legal financing contract, it’s never a bad idea to consult with other legal funding experts to make sure that you know exactly what you’re getting yourself and your firm into.
Nowadays, the market is saturated with legal financing companies offering different benefits, plans, and agreements to lawyers and clients.
It can be a risky mistake to go with the first financing company that pops up on your Google page. Rather than trusting the first company you see, do extensive research.
Not all legal financing companies are cut from the same cloth. Some offer higher rates but with quick access to funds, smooth and efficient interest tracking, and seamless communication. Others may offer a lower, more affordable rate but will provide slow and difficult access to funds and a cumbersome provision of services when it comes to digestibility and ease of use.
LevelEsq, for example, provides competitive legal financing rates but with flexible and practical features like interest-only monthly payments, no annual paydown or rest period, case-specific borrowing cost tracking platforms, and an overall net borrowing cost of less than 1% per year.
This is just one example of a legal financing company that offers good rates plus an ease of use that all lawyers can appreciate.
Analyze you and your client’s needs and compare those with different financing companies. You may find that some are better suited to your needs than others. The perfect legal financing company isn’t one that’ll just save you money but one that’ll value your time, effort, and an easy transition into the world of legal financing.
Often, lawyers can get so bogged down in the litigation cycle that they forget to conduct a cost-benefit analysis as settlement opportunities come along.
In reality, many legal financing plans contain a provision for settlement. As such, lawyers shouldn’t be close-minded to reasonable settlement offers, even if the defendant isn’t willing to pay the whole sum.
Rather than going into litigation with an inflexible goal in mind, be mindful of the financing budget that you have compared to what the opponent may be willing to pay to settle the matter.
By doing this, you will avoid incurring extra expenses that you won’t necessarily get back via the settlement cost. For example, if a case will only end in $50,000 worth of damages, it isn’t the best financial strategy to incur an additional $100,000 in legal expenses if the payout won’t even the costs.
What is considered a “good settlement” offer is difficult to define. It’s fact-specific and heavily dependent on the client’s situation and the damages they have suffered. There is rarely a clear number, but the sign of a reasonable offer can be detected when the value encompasses all the client’s losses.
If a lawyer receives a settlement offer that is unlikely to change post-litigation, it may be a sign to accept. After all, lawyers don’t want to spend money litigating a case whose outcome is not going to result in any revenue or net benefit.
Perhaps one of the worst mistakes is paying back money that you never borrowed just because the financing company does not clearly disclose financing costs and charges.
This is especially common in pre-settlement financing where companies may try to get you to pay back money for a loan that was never finalized or for funds that were never actually borrowed.
A legitimate funding company will always document every numerical transaction in the contract. Reading the contract carefully and keeping track of all expenditures throughout litigation will ensure that you don’t overpay at the company’s request.
Consider whether the financing company is really offering you the most features possible. Can the funds be easily tracked? Are the funds differentiated from borrowed money? When and how is the interest paid and at what rate? Is the financing company assisting with these steps on the lawyer’s behalf or does the burden fall on the lawyer to track and control use of the funds? These are the key questions to ask when reading a company’s contract to ensure you know exactly when, how, and how much you have to pay.
How are you supposed to select a tailored legal financing plan if you don’t know the ins and outs of your client’s case? Well, you can’t.
Lawyers risk choosing the wrong legal financing plan if they don’t conduct detailed case management analysis with regards to estimated litigation costs, chances of victory, and potential settlement or damages to be retrieved.
Financing often must be tailored to individual cases and their unique outcomes. Searching for the right financing “fit” will often result in the most effective outcome for your and your client’s needs.
Let’s not beat around the bush: legal financing rates can get expensive. Many lawyers take the “the more the merrier” approach and end up paying higher rates for longer periods of time.
Instead, once you find a reputable financing company with rates that fit your needs, apply only for the amount that will cover the most crucial, imminent bills.
Aim to work with financing companies that offer case-specific borrowing tailored to the exact amount you’ll need. This “take what you need, pay for what you need” approach can be a more controlled, systematic approach to legal financing.
Many financing companies are more secretive about how much they charge for their legal funding plans. It is easy to lean into the fanciful claims these companies put forth, but forgetting about the costs you will incur can be damaging to your legal financial management.
Don’t be afraid to lead a conversation about legal financing with the required rates. Acquire all the pricing information upfront so that you can internalize the rest of the information in context of pricing. Ask about draws, payments, costs, interest rates, and everything in between. Once you have a mental roadmap of what each company does or doesn’t offer, you can then decide whether that financing company is the right one for you.
Now that you know the common financing mistakes and some legal financing tips to offset those pitfalls, LevelEsq is equipped to offer fast and effective case cost financing for you and your needs.
With case-specific credit lines, quick personalized offers, and competitive rates and repayment terms, we can help you ease the financial burdens of representing your clients so that you can focus on providing the best legal services you can.
Not only do we provide interest tracking and flexible payback options, but LevelEsq tailors your funding needs to the specifics of each case, offering interest-only monthly payments before case settlement.
Let us worry about the money so that you can do the lawyering!
The information provided on this blog is for general informational purposes only and should not be considered as professional advice. While we strive to provide accurate and up-to-date information, we are not accountants, and the content presented here is not a substitute for professional financial or legal advice. Readers are encouraged to consult with a qualified accountant or financial professional for advice specific to their individual circumstances. The authors and the blog owner disclaim any responsibility for actions taken based on the information provided.
Level Case Financing is issued by Idea Financial, doing business as LevelEsq. All products are subject to Idea Financial's final approval. Idea Financial, LevelEsq, and Level Case Financing are registered trademarks of Idea 247, Inc.
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