Is Pre-Settlement Funding Right for Your Client?
Pre-settlement funding provides plaintiffs with a chance to receive money while they’re waiting for a case to settle. In a best-case scenario, they’ll get some financial relief and feel more confident about the future of the case; they might even be more inclined to send referrals your way and leave you good reviews.
But if your clients work with the wrong provider, it could leave your clients in a bad financial situation. How exactly does this play out and just how significant is the risk?
Pre-Settlement Funding: The Basics
We’ll start by reviewing the basics of pre-settlement funding, in case you aren’t familiar.
Plaintiffs may seek pre-settlement funding, also known as a settlement advance, legal financing, and other terms, if they’re expecting to receive a settlement in the future but need money now.
Through a pre-settlement funding provider, if approved, they can get an immediate injection of cash to their bank account. They can then use this cash for anything they wish, such as covering medical bills, personal expenses, or handling other matters.
When the settlement is won, your client will be responsible for paying that money back. Some lenders charge interest, like a conventional lender, but with Capital Now Funding, your clients are only charged a one-time fee. This means that your client’s payoff will be fixed for the life of the case. Additionally, with Capital Now Funding, settlement loans are non-recourse, which means that if the client doesn’t win a settlement, they’re not responsible for paying back the money.
Why Lawyers Are Concerned
So why would lawyers be concerned about this?
Most worries stem from knowledge of how pre-settlement funding has worked in the past. Historically, if a loan wasn’t paid back within a year, your client was at risk of owing fees more than double the amount that they borrowed. Fortunately, times have changed and with the right pre-settlement funding company, this just isn’t the case anymore. And with Capital Now Funding, you never have to worry about the payoff escalating because we do not charge recurring interest.
It’s also worth noting that some lawyers are concerned because the pre-settlement funding industry is somewhat new and unregulated – and there are examples of predatory lenders trying to capitalize on a largely unregulated industry. This just means that lawyers need to be more involved in the process and guide their clients to pre-settlement funding companies they trust.
Factors That Could Leave a Client in a Bad Position
Let’s take a closer look. What, exactly, could lawyers be concerned about?
These are the most important factors:
- High interest rates. Lawyers are justified in their concern about high, compounding interest rates. If a client incurs a debt they can’t easily pay off, or if they choose not to pay down the debt, those interest rates could have them owing much, much more than they originally borrowed, putting them in a bad financial position.
- High fees. In addition to paying high interest rates, some firms like to tack on fees as well, meaning a client could get crushed by excessive fees. Spending a few thousand dollars just to get your settlement money early isn’t necessarily a good deal.
- Lack of settlement receipt. What happens if your client never receives a settlement? Will they still be responsible for paying back the loan? In this situation, your client will already be saddled with extra debts and extra expenses, while also being unable to work or only able to work in a limited capacity. A lack of settlement, with a settlement loan on top of everything, could lead them to financial ruin if the loan wasn’t non-recourse.
- Fiscal irresponsibility. It’s also possible for a person’s own financial irresponsibility to lead to disaster here. If a client makes bad financial choices regarding how they spend their settlement advance, they could eventually face significant financial or legal consequences.
As you can see, most of these factors are dependent on the terms provided by a given lender; if you find a settlement lender with a more favorable set of terms and conditions, most of the concerns can be avoided entirely.
The Right Pre-Settlement Funding Provider
So what does the “right” settlement funding provider offer?
These hallmarks should end your concerns and make you feel better about recommending pre-settlement funding:
- A fixed fee. Interest rates can be crippling as they compound over time, but you won’t have that problem if you’re only being charged a one-time fee. These days, the smart approach is to choose a lender offering a fixed fee approach instead of an interest rate because it’s simple, it’s fair, and it’s much more attractive for borrowers.
- Reasonable fees. Also make certain there are not an excessive amount of fees being charged and that they are not detracting from the amount of money your client is receiving. Some providers will approve a client for an amount, but then deduct the fees from the amount their client receives, leaving them with less money than they were expecting. Look for a lender that is open, honest, and transparent about the fees they are charging.
- Clear, transparent terms. You should watch out for predatory lenders. If the terms are intentionally ambiguous, or if they’re overly restrictive, avoid the lender. Look for clear, transparent terms.
- Non-recourse funding. Your lender should also offer non-recourse funding. In other words, your client shouldn’t have to pay the money back if they never actually receive a settlement.
- Open communication. Finally, look for open communication. You can feel much better about choosing a lender if you can call them on the phone and have a straightforward, informative conversation with them.
At Capital Now Funding, we do our best to provide clients with transparent, honest, valuable funding – in a package that won’t leave them financially hurting. For more information or to see how we can help your clients specifically, contact us today!