Whether you are a business venture veteran or thinking of starting your first business, this may be the best time to consider the investment potential of lawsuit loans.
If you haven’t heard of lawsuit loans before, that may change very soon. While the practice of legal financing dates back a few decades, it has only recently taken off in the United States. In 2006, Credit Suisse Securities launched its own legal financing risk analysis program, which later separated from the parent company and became its own legal financing company in 2012.
Since then, hundreds of companies have popped up around the country offering financial assistance to plaintiffs who can’t afford to wait for their lawsuit to resolve. With more than $3 billion in assets, the lawsuit loan industry may be the next best business venture.
Lawsuit loans, otherwise known as pre-settlement funding, are cash advances given to plaintiffs in exchange for a portion of their future settlement or judgment. Basically, it’s when a lender purchases or invests in part of someone’s lawsuit. While the term “lawsuit loan” implies that pre-settlement funding has a traditional approval process, it is actually not considered a loan.
For example, if someone has a personal injury claim and decides to apply for a lawsuit loan, the lender does not use the plaintiff’s credit score to determine whether or not they qualify. Instead, lenders examine the plaintiff’s case to decide if their case is strong enough to win. If the plaintiff is likely to win, they are more likely to receive a lawsuit loan. In addition, pre-settlement funding is non-recourse, which means the plaintiff doesn’t have to pay the loan back if they lose their case (source: fundmylawsuitnow.com).
Plaintiffs use lawsuit loans for a variety of reasons, but most use the funds to pay for rent, mortgage payments, bills, groceries, and more. This is because most of the people who apply for lawsuit loans are pursuing a personal injury case and most likely can’t work while they recover.
Pre-settlement funding is one of the fastest-growing industries in the United States. Since there are few federal and state regulations for lawsuit loans, it is much easier for new businesses to break into the industry than other financial institutions.
According to an industry report by Burford Capital featured in the New Yorker, the number of attorneys in the US who have helped one of their clients get a lawsuit loan increased from 7% to 28% between 2013 and 2015. Here are some of the reasons why the lawsuit loan industry is growing so much.
One of the major reasons for the success of the lawsuit loan industry is the number of personal injury claims being filed per year.
A report from US Courts found that the number of personal injury claims filed between 1990 and 2019 almost doubled, with a 20% increase between 2018 and 2019 alone. In addition, personal injury lawsuits made up almost a third of all civil cases filed in a district court during 2019.
As a result, most lawsuit loan lenders choose to provide funding for personal injury cases, most notably claims that involve auto accidents, marine injuries, medical malpractice, and dangerous pharmaceuticals.
Since personal injury cases often involve clear liability, they tend to have a higher value, especially when serious injuries occur.
A survey of personal injury plaintiffs conducted by Nolo finds that around 70% of all plaintiffs receive some sort of settlement or judgment. Out of that group, half receive a settlement or judgment worth anywhere from $10,001 to more than $75,000. However, this includes people who handle claims by themselves.
Plaintiffs who had a lawyer managing their case received more than $75,000 on average for their settlement or judgment, while plaintiffs without legal representation only received around $15,000.
Lawsuit loan lenders typically focus on severe cases represented by a lawyer, since they carry the highest potential value.
Investing in lawsuits involves an incredible amount of risk, so lenders typically charge high interest rates. Most lawsuit loan lenders charge around 37-60% interest compounded monthly, and since lawsuits take months or years to resolve, lenders receive a high return.
For example, if a lawsuit loan lender gave a plaintiff a cash advance of $20,000 at a 40% interest rate compounded monthly and the case settles in one year, the lender receives $20,000 plus $8,000 in interest.
As you can see, the demand for lawsuit loans continues to rise throughout the country. Due to the lack of regulation, it is easy to start a lending company. However, this may not be the case for long, especially with leading lenders creating their own trade groups and states starting to create their own regulations for lawsuit loans.
Members of the largest trade group, the American Legal Finance Association (ALFA), provide 90% of all lawsuit loans in the United States. In addition, this group supports regulation of the legal financing industry. As a result, the regulatory future of lawsuit loans is uncertain.
Although there is a lot of competition in this young industry, there are several opportunities to experiment with different types of case risk assessments and attract potential investors for your venture.
By Josh Brown