As an investor, one of your primary objectives is to make wise investment decisions so you can maximize returns from your seed money. In line with this, you also need to have a strategic plan that includes diversifying your investments, reinvesting, and staying on top of the news in your industries of interest.
Wise investors take the time to understand the risk at hand before investing. They stay informed!
Well, having touched on risk assessment, there is always a chance that your venture or the business you invest in might face legal issues at some point along the way. But, to be honest, litigation rarely comes cheap, and if the business you invested in goes down, your money could go down with it.
Thankfully, the legal financing industry has grown steadily over the years, providing a way out to many businesses or individuals dealing with expensive lawsuits or litigation processes. As their popularity increases, many investors are considering investing in lawsuit lending.
With this being said, here are a few things investors should know about lawsuit loan startups.
1. What Is Lawsuit Financing?
Also known as litigation loans or litigation financing, lawsuit loans are just as the name sounds.
A lawsuit finance startup is a company or lender that provides funding to plaintiffs and law firms for cases with higher chances of winning or settlement. The lent money is basically used by the plaintiff/law firm to cover the legal expenses and other costs associated with the lawsuit they are about to file.
In many cases, the lender may award money in advance to a plaintiff as the court case is in progress or a settlement is pending. If all goes according to plan, the beneficiary returns the borrowed money along with a sizable interest on top, which is normally a percentage of the final settlement/compensation.
Litigation lenders usually provide funding based on several factors. Some of these include the following:
- The value of the case
- The amount needed by the plaintiff/law firm
- The likelihood of winning the case
- And other specifics
It is worth noting that litigation lending comes with a sizable risk as well. This is why lenders (and investors in these startups) have to be really careful when choosing their clients and estimating the expected returns.
2. How Popular Is Litigation Finance?
Litigation funding startups go as far back as the early nineties. Today, there are hundreds of lawsuit loan startups in America – potentially more.
Launched in 2016, for example, Legalist is among the biggest names in this industry. They’ve reported an incredible surge in demand for lawsuit funding in the past few years. As a result, most of these startups are looking for investors to help keep up with the rising demand.
Co-founded by Eva Shang and her classmate Christian Haigh (Both Harvard dropouts), the 11-person startup based in San Francisco, Ca, has achieved tremendous success over the past few years. They also have principal offices in London, UK, and Las Vegas, Nevada, and many others spread in different locations.
Currently, the lawsuit lender oversees approximately $140 million worth of assets under their management. As revealed in a recent article by Jalen M. Nelson on how Legalist changing the legal funding industry, some of its largest investors include institutions like family law offices and insurance companies.
The same post also hints at a $1 billion asset base target over the few years ahead. Considering how much of a force Legalist has been in the lawsuit funding market, we might mention it severally in the remaining bit of the article.
3. Who And How Can Lawsuit Loan Startups Help?
A lawsuit is inarguably the last thing you want to face as an individual, business, or institution in the corporate world. Depending on the complexity of the contentious issue, lawsuits are time-consuming and expensive, and often overly frustrating. They are even more intimidating when you don’t have enough money stashed somewhere to cover the various costs involved.
Thankfully, lawsuit lenders can bail you out financially if you are a plaintiff or law firm looking at a case like:
- Personal injury case
- Wrongful death case
- Medical malpractice case
As the plaintiff, there is a big chance you could use a boost to finance some of the expenses incurred before a fair judgment or ruling is passed in court. The same case applies while awaiting settlement in a case similar to the ones mentioned above. Moreover, attorneys and law firms may also approach these startups for lawsuit funding.
In a nutshell, lawsuit financing startups buy part of the settlement in a lawsuit. Since the investment risk is high, lenders earn a significant sum of money in interest from the settlement or compensation.
4. How Lawsuit Funding Differs From Conventional Loans
A lawsuit loan is simply a cash advance to the plaintiff or borrower before getting a settlement or compensation for their damages/harm. Before a lender issues the loan, they will obviously consider a few things and make certain assessments. The main difference between a lawsuit loan and a traditional loan is that the approval criteria are different.
For instance, the plaintiff’s credit history, employment, and income verification are rarely considered in lawsuit lending. The likelihood of getting approved is largely determined by the strength of the case and how far away it is from a ruling or settlement.
Furthermore, the plaintiff may not have to pay back the borrowed money if they lose the case. This is one of the factors that make lawsuit financing a tight gamble for investors. As we shall see below, the regulatory aspect is also a bit different because legal financing is viewed differently by state and federal regulatory bodies.
5. Lenders Prefer High-Value Lawsuits Like Personal Injury
As earlier established, lenders in the lawsuit funding market need to be bold and keen in the cases they choose. They need to be analytical risk-takers to maximize their returns. This is why many lawsuit loan startups will only consider the strongest cases for loan approval. Most of them take preference in personal injury lawsuits, where negligence is apparent if not obvious.
A personal injury compensation claim can attract a huge sum of money in a court judgment or insurance settlement if negligence is established. Lenders consider these as high-value cases, with the following examples being fairly common.
- Personal injury from a road accident:
- Medical malpractice cases:
- Slip-and-fall accident on public or private property:
- Injury from defective product:
- A workplace accident or injury:
Surveys from multiple sources have indicated that more than half the time, these cases are settled before they reach court. A majority of personal injury claims that make it to trial also result in compensation. A settlement or judgment will vary from one case to another, but personal injury cases fetch really well. If you like, you can look at them as the gold mine of lawsuit loan startups as an investor.
Nonetheless, the odds of getting fairly compensated are higher for plaintiffs with a decorated lawyer in charge of their case. For this reason, most lenders will also require the applicant to have a reputed lawyer representing their personal injury case. Thus, it reduces the lending risk a tad bit, and the returns could also be potentially higher.
Are More People Filing Personal Injury Lawsuits?
Thanks to advancements in tech and the internet, more people know their rights these days. This is unlike past years where you had to book a lawyer’s appointment just for clarifications on your legal entitlements. If the US courts annual report from 2019 is anything to go by, the last three decades have shown almost a double-digit increase in the number of personal injury claim cases filed in American district courts. From the same report, these cases also accounted for nearly a third of all US civil cases in 2019. Apart from auto accidents, most cases involved defective drugs, medical malpractice, and marine injuries.
6. Why The Legal Financing Industry Has Grown Tremendously
As earlier iterated, the legal funding market has shown tremendous growth over the past few years, specifically in the US. As pointed out earlier, this has been caused by various factors, including the remarkable surge in personal injury cases.
Combined with the fact that the legal lending market is underregulated, the signs of slowing down are slim to none in the growth of this industry. This is something that wise investors should follow up on with keen interest.
CNBC’s Sarah O’Brien says that as long as you are well-informed before investing in litigation financing, you can get the most from your seed investment. This includes knowing how to choose high-value cases and how to beat the competition.
7. Increased Demand In Pandemic Times
Let’s get back to our earlier example – Legalist – for a minute. In an interview with the Business Insider, Eva Shang, the company’s co-founder, cited the COVID-19 pandemic as one of the reasons the demand has risen in the litigation financing market.
Apparently, lawsuit financing has provided a way out for most law firms financially strangled by the effects of the pandemic. As long as a law firm has a high likelihood of success, they automatically are considered a high-value client by legal lenders.
8. The Technology Boost
Lawsuit lending startups also have to embrace technology to maximize their returns. They have to utilize a combination of systems and tools to help spread awareness, fish for clients and streamline their services online and offline.
These often include tools to keep in touch with law firms and previous clients as well. It includes using analytical tools and algorithms that help predict the likelihood of winning a case before approving a loan. Additionally, these lenders have their own attorneys who vet the cases and help pick the best ones to take up.
9. A Word On Regulation
As mentioned earlier, legal loans are different from traditional loans regarding the applicable State and Federal regulations. In the eyes of the state and federal regulators, a lawsuit loan is more of a payment or an investment.
Furthermore, financing is non-recourse, and the rules regarding lawsuit funding are non-existent in many states. These are just a few of the many factors that make it easy for legal funding entrepreneurs to start a lending business and secure investors.
All the same, some states like Colorado have lawsuit loan regulations in place. Moreover, lawsuit lenders have also partnered up and created trade groups to help establish clear ethical guidelines.
The American Legal Finance Association (ALFA) is the leading body of its kind in the US, and it can easily be accessed online. This helps protect consumers while restricting overfunding and regulating referral commissions.
10. Funding Fees
When seeking legal funding, the plaintiff or law firm should expect to pay a funding fee once they win a settlement or compensation judgment. The fee could range between 2.5 and 4 percent monthly or 30 and 60 percent annually. While you only pay when you receive compensation or settlement, these lawsuits could take months or years before a conclusion.
As the plaintiff, the final amount you pay to the lender could easily be twice or thrice as much as you borrowed. That’s another great perk for being an investor in this industry, especially if you are patient.
In most cases, litigation funding is repaid from the final settlement or compensation minus expenses. These may include expenses like attorney fees, litigation costs, and medical bills. Lawsuit lenders are paid from what remains after these fundamental expenses are deducted. This is crucial to note as an investor.
Wrapping It Up
To sum it up, lawsuit loans are increasingly becoming popular. They are minimally regulated, and the returns are incredible if you invest in the right cases. As a result, the demand is soaring, and the market predictions are all in the investor’s favor.
With all this in mind, one question should linger in the minds of many investors. Is a lawsuit financing company the right investment choice for me? Well, it could be if you responded proactively and invested wisely. Hopefully, the above pointers should keep you informed and ready to make your big move.