How does legal funding work?

by | Aug 17, 2021 | Finance Litigation, Pre-Settlement

In recent years, legal funding has become popular with many individuals looking to pursue a personal injury lawsuit. Also known as pre-settlement funding or lawsuit advance, legal funding helps individuals fund their lawsuits so they don’t have to take an early settlement figure.

So How Does Legal Funding Work?

With our guide you can learn how to Pay For Your Lawsuit With Pre-Settlement Funding To Avoid Early And Unfair Settlement

In the US, a large majority of personal injury cases are settled out of court and the POINT TO NOTE here is that the plaintiffs seldom receive a settlement amount that they truly deserve given the strength of their case.

Don’t Let Insurance Companies & Lawyers Dictate the Terms

The thing to understand here is that when you go to court seeking damages in a personal injury case, you’re up against powerful insurance companies. It doesn’t make too much of a difference to the latter if a particular case is settled, let’s say, for $50K or $300K. They have the power of money and they call the shots. As such, they will almost always try to shortchange a plaintiff by offering a highly underrated settlement amount.

This is because they know all too well that filing a lawsuit and continuing with the legal process incurs heavy financial burdens on most individuals. If the injury is serious, there will be significant medical expenses—both initial and recurring. One may also have to suffer loss of income due to days missed at work during recovery and so on.

In the meantime, however, one will have to keep paying their regular bills: mortgage, rents, school fees of children, and all other types of regular expenses. And if you don’t have enough emergency funds stacked aside, you’ll understandably find it difficult to stay on top of your regular financial obligations. Bills will be either not paid at all or paid late. Which means you’ll have debt collection agencies hounding on you with written notices, frequent phone calls and the like. And one can imagine that the situation, and the ensuring stress, often becomes too overwhelming for a person to handle.

And the insurance companies of the defendants look to exploit this plight of the individuals by offering (often outrageously) low settlement amounts. However, many victims of wrongful injury will still end up accepting the offered settlement (often knowing full well that they are being shortchanged) in order to get out of the financial hole they find themselves in at present.

However, with legal funding options available, you don’t need to do that anymore. If you have a strong case (your attorney will of course determine the strength of your case and the settlement you deserve), you can take out cash advance through lawsuit or pre-settlement funding from a reputable funding company. You can then use the cash to meet your present financial needs as well as to pay for the cost of the continuing legal process.

Legal Funding: Recover Damages Rightfully Due to You

Let’s imagine a situation here. You’ve filed a lawsuit for personal injury and your attorney is in conversation with the insurance provider of the defendant vis-à-vis an out of court settlement. Now, the insurance company offers a $100K settlement, and yet, according to your attorney, your case is worth $300-400K at the least.

However, by this time, you’re all but financially drained and you know it’ll be difficult for you to carry on with case unless you come into some much-needed cash right away. This is where a lawsuit funding company can salvage the situation for you. So, for example, you borrow an amount of let’s say $10K, which you know will help keep your head above the waters for some considerable period of time (a few months, or more).

So, with the help of the loan/advance (more on this later), you decline the settlement offer and your attorney keeps working and building on the case. This means that at a later date, as you show a strong hand, the settlement offer from the insurance company will increase drastically. Now, if the offer appears fair to you, you may accept it. If not, you can continue with the legal process and wait for the ultimate verdict given by the jury.

In short, by dint of taking out that lawsuit advance, you may eventually get to receive a $400K settlement in place of the initial $100K offer.

Use Pre-Settlement Funding to Fully Recover from the Accident/Injury

However, it’s not only about the money. In cases where a person is seriously injured, he or she may need to undergo expensive surgery in order to fully recover. However, many people will put off surgery (even when the costs are covered by their medical insurance) simply because they cannot afford to lose days in work during recovery.

Therefore, most individuals will go for some sort of conservative treatment under the circumstances. This, however, can have long-term negative effect on their health and they may never recover fully from the injury suffered. However, this problem can be resolved by obtaining a cash advance on a settlement. With the money, you can take the time required for proper healing and rehab and can ride out any potential wage loss incurred by the recovery.

What is more, the value of your expected settlement increases rather dramatically once you get the surgery done. Also, take note that many funding companies will be more willing to approve your funding request once they know that you have undergone a surgery. This is simply because taking a surgery acts as a clear proof that the injury you suffered was indeed serious enough. On the other hand, opting for conservative treatment is often interpreted, both by the court and the funding company, as your injury being not so serious after all—just since you didn’t need or take a surgery.

How Does Legal Funding Work?

Legal funding or lawsuit advance is provided by a lawsuit funding companies based on the merit of your case. In most cases, you’ll need to apply for the advance through your attorney or the law firm you’re working with. The funding company will then go into conversation with your attorney and will judge the merit of your case on the basis of all the present facts, documents, information, police and/or eye witness report, etc. Afterwards, if they feel that you have a strong case for settlement, the money will be advanced to you typically within 2-3 days.

Costs of Legal Funding

You don’t need to pay anything out of your pocket to obtain a cash advance on your settlement. All payments against the loan are paid off only after you reach a settlement. However, in case you fail to win the case, you won’t have to repay the money you borrowed and you won’t owe anything whatsoever to the lending company.

This is why legal funding is also known as ‘NON-RECOURSE advance.’ It is a type of loan, of course, and there are interests involved. However, since it is ‘non-recourse’, this type of cash advance does not come under the purview of traditional lending products.

The interest rates vary from one company to the next and some companies will charge compounding monthly rates. Typically, you can expect to pay anything between 30% and 60% p.a. for your loan (the rate may also depend on the relative strength of your case). This is no doubt a somewhat hefty amount (average annual credit card interest rates, by comparison, hover somewhere around 16-17%). However, this is somewhat expected given that the loan is a non-recourse one and the funding companies themselves are taking a risk advancing the money to you.

Final Words

Lawsuit advances can be a big help to individuals who find it difficult to carry on with a personal injury case. With legal funding available, you don’t need to settle early for an amount that is much lower than what you actually deserve. However, as mentioned, legal funding is a costly if convenient option. So, make sure you take out an amount that is absolutely necessary and not more (your lawyer can help you determine this amount). Finally, make sure to work with a reputable funding company with a good track record so you don’t end up paying more than what you need to. Again, your attorney will help you with this since most legal funding transactions are carried out between the working attorney and the lending firm. The attorney will evaluate the repayment terms and will sign the contract only if the terms appear reasonable to him.


Jessica Diaz, CFA

Financial Advisor

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• Masters in Business Administration

McGill University

• B.S. in Business Administration

University of Colorado


• Corporate Finance Advisor

8 Years

• Personal Finance Advisor

11 Years