ARE LAWSUIT LOAN FIRMS GOOD BUSINESSES TO INVEST IN?

Even as we speak, there are millions of people waiting to win a lawsuit so that they can cover, let’s say, their medical bills, get a new car after an accident, or even start a business. Sometimes the legal process is not as fast and needs such healthcare can’t be put on hold to wait for the court to make a decision. This is where lawsuit loans come in. In recent years, the lawsuit loan industry has been growing steadily over the past few years, with some young legal lenders giving more than $100 million in cash advance to plaintiffs as they wait for a court ruling or settlement.

From a business perspective, lawsuit loan firms might be a good investment for big investors. However, just like you probably must have done in any other business you have invested in, you need to have some background information on the industry before investing. If you’re reading this, you probably have several questions at the back of your mind, like:

• Are these businesses profitable?
• How is the local market competition like?
• Are the current lawsuit lenders getting decent returns?
• What are the risks involved?

This then begs the question, Are lawsuit loan firms really a good investment? Well, there’s only one way we can find out. Let us look at some of the most important information you should know before taking a dive into these waters.

Before you can go ahead and invest in the lawsuit loan firm, take a minute and learn how the process of lending these loans work. For one, you need to know that you are loaning out money to plaintiffs who expect to settle or win a case. This means that the borrower (plaintiff) approaches the lender with details of the ongoing lawsuit. The firm is then supposed to evaluate the likelihood that the client is going to win the case.

The specifics about the case and consultation can reveal the likelihood of the client winning the lawsuit. The evaluation is what helps the firm to make a decision on whether to approve or decline the loan application. In case they accept, the client is expected to pay back the lent amount plus a funding fee, all of which come from the proceeds of the court settlement or the compensation amount once they win the case. In most cases, no payments are supposed to be made before the ruling is made.

The interest rates for these kinds of loans are substantially high, obviously due to the risks involved as we shall learn a bit later. This means that as an investor in a lawsuit loan firm, you can expect big returns if the client wins the lawsuit. If the case takes longer, you might find the client paying back double or even triple the amount lent to them. You should however note that most people take on these loans when they have pending personal injury lawsuits that they are sure will compensate them. Most of these lawsuits are closed even before trial. In this case, a lawsuit loan firm gets just the principals and the funding fee charged.

Lawsuit loans are paid back after all other expenses have been met. These expenses may include:

• Attorney’s fees
• Litigation expenses (court costs, server fees, and copy costs)
• Any damages that might have been caused to the plaintiff

The loan is only paid back from what is left when all these other expenses have been sorted out. This introduces another slight risk that will be discussed shortly.

Here is where trouble knocks for you as the lender. When giving out a lawsuit loan to a client, you bet on the possibility that they may win the case. If they happen not to win, they are not obliged to pay up. This is why Jared Stern from Uplift Legal Lending notes that loans for lawsuits are even more beneficial to borrowers because the risks are lower on their part if they don’t win the case. It is just like when you hire a lawyer on such a case and they work on a contingency basis.

Well, this is an obvious risk that a lender or investor in the lawsuit loaning industry should be well aware of and are willing to take when you decide to invest. It’s also why the cost of such loans is significantly higher than other loans. When the expected case is lost, you cannot follow after the client since you initially looked at the case proceedings and ruled out that there is a great possibility of them winning. This is often part of the reason you decided to accept the request in the first place, and all this information is contained in the agreement you signed with them.

Also, if the settlement comes less than what was expected, the client cannot pay more than the amount of the settlement. They would if they wanted to but they are not obliged to do so. Simply put, the lawsuit loan business has its risks, and lenders may suffer significant losses if most of their clients aren’t winning settlements. As for the client, whether or not they are compensated after their loan request has been approved; it’s a win for them.

As hinted earlier, one major question that any investor would want to ask before deciding to venture into the legal lending business is what are the benefits? Well, we can begin by looking at the cost and the interest that the loan could gain. As earlier stated, these are high-risk loans in which you as the lender suffer the most in case the lawsuit doesn’t go in favor of the plaintiff.

That being said, lawsuit loans have a significantly high cost (funding fee) and interest rate. Most of the people coming to the firm with loan application forms are desperate victims of accidents awaiting personal injury claims to help them pay medical bills and cover other financial obligations. They will therefore almost agree to any terms that are presented to them.

This is not to be mistaken for ripping off clients. It is purely business and it is meant to balance the risk with the reward. As an investor with the knowledge of what is at stake, capitalizing on the gains based on the risks you are facing is allowed. This should, however, be done with the full consent of the client, lest you find yourself facing a lawsuit yourself.

Knowing the magnitude of the risk you are taking, it’s only human that you make the most of it. You should be vigilant when checking the likelihood that they will win the case and pay back the loan lent to them. Failure to look at certain specifics such as those could lead to you signing off a loan to a client whose case won’t be getting them anything. To be clear, the main benefit of these kinds of loans is the fact they are very expensive which translates to profits for both the firm and the lender.

Having mentioned what benefits such loans have to the firm and the returns investors are likely it’s good to also have a clear picture of the possible demerits of the same.

A lost lawsuit: 

To begin with, let’s talk about what you are likely to go through if the expected lawsuit isn’t won by the client. The rules are quite clear; the client will pay the loan from the settlement they get from the court. This means that if there isn’t any settlement or the court doesn’t rule in the plaintiff’s favor, things can hit a snag. You as the investor or lender can as well forget the money lent out. While the amount might not be much, that could be a great loss. The firm will have to write it off as a bad debt or record it as losses in the financial statements.

Lower settlement than expected:  

Other than losing the lawsuit, the settlement may be less than the loan amount lent out. Still, the rules are quite clear; the loan can only be paid from the settlement of the court. This should tell you that if the amount given out as compensation is less than the loan amount, you are up for great losses.

While the funding fees and the interest could have added quite a huge sum of money to the initial principal, if the settlement is less, you will be lucky to even recover your principal. This is one of the reasons most people dislike these kinds of investments. While the profits are promising, the risk is too high and most people don’t want to be part of that.

Locked funds:  

Also, once you have invested in the lawsuit business, it’s like you have tied your money up. You can’t get access to that money until it is put to work and it brings in profits. If the litigation process will take more than two years to close, so will your money. Although the returns increase with the longevity of the lawsuit, sometimes the case can take too long that the money can’t help you when you need it. Most people want an active source of income-kind of investment and the lawsuit loan business isn’t exactly that. It just holds up your money indefinitely with a substantially high risk of loss.

Legal lenders are just like any other lenders, only that these companies constitute a different structure. Basically, litigation financing firms are made up of a team of lawyers and investment professionals. The investment pros take care of the finance part of the deal, including structuring the loan, determining interest rates, approving, and disapproving. On the other hand, the legal team is tasked with assessing each case to determine its probability of success.

In many scenarios, legal lending firms have a structure similar to an equity fund. Where capital is raised and a specific period is deployed for it to be put to work. Some of these firms also provide legal financing to businesses that fund plaintiffs in commercial lawsuits such as contract breaches and patent infringement cases. The borrower gets funding for litigation expenses like investigation, attorney fees, experts, and so forth at an agreed fee.

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The major benefit of commercial legal funding is that these lawsuit loans tend to have higher returns. This is why they are majorly attractive to legal financing institutions these days. This is what you would call a good business to invest in if you are considering the lawsuit financing firm option. Nonetheless, commercial legal lenders face almost the same risks as lawsuit lending firms that finance individual plaintiffs.

If it makes any difference, investing in a lawsuit loan firm means helping out the millions of people dealing with various hardships because of a personal injury claim that hasn’t been closed by the court. Life could be hell on earth for these people, especially if they are injured in a manner that they can’t work. Lawsuit loans are meant to help them afford their financial needs during the litigation period.

The money also tends to earn a lot of interest over time due to the high-interest rates associated with these types of loans. This means that you get to earn much more over a short time if the company is keen and analytical enough when making lending decisions. The answer to whether this is a good business to invest in will depend on various factors. For instance, are you an aggressive investor? Are you a risk-taker? What are your personal preferences? The pointers in this article should help guide your gut on whether a lawsuit lending firm can be a suitable investment for you.