Traditional lending institutions are subject to specific laws that lawsuit funding companies are not. To clarify, lawsuit (or legal) funding companies don’t work like conventional financial institutions such as banks.
The reason why legal funding companies don’t work like banking corporations is due to the fact that when a bank offers a loan, these are directly coming from the lender’s capital reserve and are paid back with a precise interest rate every month.
The difference is that legal litigation funding is non-recourse and solely relies on purchasing a plaintiff’s future settlement check; there are no monthly payments and no credit checks. If the lawsuit ends up as a loss, the company carries all the loss, and the plaintiff walks away without paying a dime. Non-recourse third-party funding means that legal funding is much riskier to the investors than a traditional loan is to the banking institution.
On the flip side, legal funding is an alternative and beneficial financial solution for plaintiffs and attorneys experiencing economic challenges.
Factoring, just like lending, is fully legal
A 2015 New York Supreme Court case said that “purchasing future settlements involves a certain amount of risk, so legal funding companies are exempt from usury caps and should not be governed under the same laws as traditional lenders.”
Factoring is a financial transaction in the legal funding industry that 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 is the defendant, such as the insurance company, that paying the expected receivable from the litigation.
3. A third-party factor (legal funding companies) or third-party funding firms.
Any financial transaction that is financed through a factor is called funding advance. In short, the receivables that are to be paid at a later date are being made available immediately.
Attorneys and plaintiffs can take advantage of factoring to help cover expenses while the legal process takes a long journey to completion.
Reasons why legal funding companies exist
A pending attorney fee or settlement award can be classified as a receivable that will be paid in the future. Attorneys fees and settlement proceeds can be delayed for quite some time making life difficult for plaintiffs and attorneys alike.
This is why settlement funding companies were created:
1. Attorneys and plaintiffs usually wait long periods for their future settlement money to arrive and even much longer than other careers and industries.
2. The underwriting process in the legal funding industry does not focus on credit scores or finances. They focus on the information pertinent to your lawsuit. For example, damages, liability, and the recovery timetable dictate what a litigation funder thinks a case is worth at the present moment. Lawsuit funding also takes into account the attorney’s portfolio of cases when reviewing a firm’s ability to pay back once the lawsuit settles.
By expanding the scope and scale of our underwriting process to include the essential aspects of trying cases and running a law firm, we have customized our operations to fit all those in need of our assistance.
Unfortunately, most people who are going through financial challenges aren’t always qualified for a traditional loan. Most banks place great importance on credit scores and history. However, legal funding companies don’t look at poor credit scores in order to qualify for settlement funding.
While legal funding fees are typically high, Baker Street Funding strives to provide a litigation-funding-friendly approach. This process takes into account several factors, including but not limited to attorney qualifications and litigation hurdles that must be passed.
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.
Looking for lawsuit funding where you can save money and get the benefits of simple interest and capped rates? Check out Baker Street Funding’s legal funding application. An easy application form to get you started today.