Pre-Settlement Legal Funding Vs. Traditional Financing

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The legal funding industry is a group of lending companies willing to provide non-recourse financing to attorneys and people involved in litigations.

The motive behind funding a lawsuit is to empower people suffering from financial stress during their cases’ pendency period. Taking matters to the courts isn’t easy, and legal claims often push even well-off individuals to financial concerns.

This is especially true in personal injury cases. People with severe injuries or long-term disabilities cannot afford household expenses or make ends meet. Additionally, fighting a case while paying for living expenses and going through primary medical treatments in parallel can result in crippling debt. 

For this very reason, pre-settlement legal funding companies help with risk-free cash advances against pending settlements or awards for those who need to meet basic expenditures.

So how do two unrelated financial products, legal funding, and traditional loans, stack up? Here’s what you need to know.

Traditional banks 

Traditional lending institutions are subject to specific lending laws that lawsuit funding companies are not. When a bank offers a loan, it comes directly coming from the lender’s capital reserve and is paid back with a precise interest rate every month. 

With traditional banks, most banks place great importance on credit scores and history. Plus, having a stable income is essential for approvals. They also require borrowers to back their loans with collateral, and lenders have specific limitations on what the potential borrower can utilize the funds for.

With traditional lending, the application process can take weeks, in addition to the mounting of documents borrowers must provide to show they can pay back the loan before getting approved.

Unfortunately, most personal injury victims face financial challenges and aren’t always qualified for a traditional loan. 

Pre-settlement legal funding

Pre-settlement legal funding takes into account three main concepts:

  1. A seller is a plaintiff or an attorney with a pending settlement, award, or attorney fee receivable.
  2. An obligor who is the defendant, such as the insurance company, that paying the expected receivable from the litigation.
  3. A third-party litigation funding company.

Settlement funding is a non-recourse advance that solely relies on purchasing your future settlement, compensation payment, or fees. For instance, a pending attorney fee or a claimant’s settlement award can be classified as a receivable that will be paid in the future. 

If your lawsuit ends as a loss, no receivable is received. In this case, the lender carries the loss, and you walk away without paying anything back. 

Overall, the funding process focuses on the information pertinent to the lawsuit itself. A pre-settlement legal funding company will decide on a case’s worth and its merits with information such as damages, liability, and the recovery timetable. If the funding is for a plaintiff, an attorney must be present and participate in the process at all times.

Furthermore, unlike traditional banking institutions, there are no monthly payments or credit checks in order to approve a settlement advance. 

Similarly, for law firm funding, lenders consider the attorney’s portfolio of cases when reviewing a firm’s ability to pay back once the claim is resolved.

When traditional financing is not an option, legal funding is an alternative and beneficial financial solution for plaintiffs and attorneys experiencing economic challenges since it provides much larger funding amounts and no risk to the borrower.

How pre-settlement legal funding and traditional loans compare

The main difference between a pre-settlement and a traditional loan is that pre-settlement legal funding is not a traditional loan. A pre-settlement loan is non-recourse and due only if a case is won, while a traditional loan has to be paid back monthly.

Traditional loans have a much lower interest rate than pre-settlement legal funding, which can be helpful if you can afford to make those payments. Pre-settlement legal funding has much higher funding amounts, usually up to the millions.

Settlement financing is much easier to access than traditional loans if you have a strong case. Plus, pre-settlement legal funding will not show up on your credit report. There is also no asset behind these advances. In other words, if you don’t win your case, there’s nothing the funding company can seize.

The takeaway

Attorneys’ fees and settlement proceeds can be delayed for quite some time, making things difficult for plaintiffs and attorneys alike. The good news is that pre-settlement legal funding is not the only lawsuit funding solution for most plaintiffs. It is also a financial option for attorneys who have trouble accessing a large amount of capital through a traditional loan. 

Since pre-settlement legal funding companies don’t look at credit scores and don’t rely on assets in order to back the loan, the interest rates are typically higher than traditional financing. However, pre-settlement funds are made available immediately to you after approval.

With Baker Street Funding, we expand the scope and scale of our underwriting process to include the essential aspects of legal cases and customize our interest rates to fit all those in need of our assistance. Rates start at 2% simple per month, capped in the third year of the loan.

Since it is a non-recourse financial transaction, you repay the borrowed funds only if your case ends up victorious in the end. 

Take advantage of Baker Street Funding’s lawsuit advances to help cover expenses while the legal process takes its journey to completion.

Check out our legal funding application —an easy form to get you started today.

At Baker Street Funding, we give you the inside scoop on pre-settlement funding by covering a variety of ... financing and legal topics to help you made the best financial decision for you and for your case. Our experts break down complex ideas in a way that's easy to understand so you can stay informed on current trends as well as tips and fact checked information by the CEO and founder, Daniel Digiaimo. Furthermore, Despite its name, consumer legal funding is not a loan. If you don't win your case, no payment needs to be made back. To avoid confusion and simplify matters on, we'll use the word "loan" throughout this article.

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