You’re expecting a big settlement from a lawsuit, but the money hasn’t come in yet. In fact, the case hasn’t even been settled, so you’re out of luck until you get the judgement from the court, right? Hold on. You don’t always have to wait for a settlement to spend the cash. Some companies will advance you the money. How is this possible?
It’s a Loan
Everything is possible when financing is involved. Since courts won’t give you the funds before the decision is made in your favour (they are a court of law, remember), a bank or lending institution can. Special lending institutions exist that will advance you the money before your case is over.
They’re willing to do this because the amount they lend you comes with an exceptional fee, called a “funding fee.” It’s basically an interest charge – similar to what banks charge you for loans. The difference is that these funding fees are quite high. You’re paying for the privilege of accessing funds you haven’t yet earned.
The lending institution is also taking a huge risk by advancing you the money. It must weigh the risks of the advancement against your odds of losing. If you win, the lending company gets their loan back with the addition of fees. If you lose the case, however, they get nothing.
Unlike a traditional loan, you can’t lose twice with a pre-settlement funding arrangement. It’s called a “non-recourse loan.” The lender takes all of the risk. Do you now see why funding fees can reach into the 15 per cent per month range?
That’s right, you may end up paying the equivalent of 15 per cent interest on your advance. But is it worth it? In many cases, yes. The main benefit of pre-settlement funding is that you get the cash you need right now.
While it’s easy to baulk at the high fee structure, the fact of the matter is that you’re usually not just paying for a convenience. Sure, it’s convenient to get the money quickly as opposed to waiting for the court system but, if you have to pay your utility bills out of the settlement to keep the lights on, pretty much any fee you pay will be worth it so that you have food on the table and a warm bed to sleep in at night.
Of course, when considering a lawsuit cash advance, fees do matter. If the fee is so high that it will erase most of your settlement, it’s hard to make a case for getting the funding. In general, you should try to avoid paying more than 20 per cent of the total settlement amount. More than that, and you start getting to a point of diminishing returns.
Even if your lawyers are working on a contingency basis, they will eventually be seeking fees for services. If those fees amount to 20 to 25 per cent of the settlement, you’re left with about half of the total amount you won in court.
That might not be enough for the long-term. Your attorney can advise you on the best course or action and most lawyers can recommend a good funding company if it makes sense for your particular case.