What to Know About when Financing Legal Fees
It is true that most of the small as well as medium sized law firms are aiming to grow but only few of them have the capital needed to handle the increased case of loads or extended settlement payments. Factoring which is basically the sale and purchase of accounts receivable where in this case is legal fees is at a discounted or near the time of creation can help in solving this common cash flow problem.
What the specialty finance firms do is purchase legal fees on the settled cases. The moment when a case is settled and that all documents have been executed properly by the defendant and plaintiff, the fee receivable is bought for a discounted price which is normally ranging around 2 to 12 percent depending on the amount and payor. The main difference in rates is the estimation factor of time that it would take to collect the fees.
Here are the steps on how the entire thing works.
Number 1. Master fee purchase agreement – this is executed in specifying terms of under which fees will be bought and this includes both the maximum and minimum amounts, fees, rebates and advance rates.
Number 2. Submitting fee purchase – here’s where the submission of fee for purchase by utilizing the submission forms/process factor is done. As a matter of fact, the documentation is simple and closing is often done within 1 to 2 days. When it comes to the documentation, it only needs the copy of client fee agreement, copy of judgment or settlement, must be signed by the defendant as well as the insurance company or other payor and must have a letter of instruction from the attorney to the payor directing the payments to lockbox or bank of factor.
Number 3. Acceptance – the purchase of fees is all subject whether it’ll be accepted by the factor or not. The discount will be included as well in the factor’s fee and in any margin or haircut form of the face value to which the factor is required. In most caes, the factoring of legal fees is requiring no haircut but this happens assuming that the payor has a clean and good credit standing.
The letter and even the assignment of instruction from you will be sent to the payor of fee which is the insurance company.
Number 4. Payment – the payor has to send the checks to the factor where the amount is credited to your account as received. In case that the payor paid in a timely manner or in other words within 3 months, you are going to get a rebate when enough money is collected when closing a transaction.