Continuing from last post, the lawyer explained to me that typically, case funding came from the law firm itself. Law firms provided financial support to their lawyers in exchange for profit cut from each claim when the case concluded, and law firms’ funding itself was typically from wealthy partners and banks. The larger the law firm, the more funding it could provide to its lawyers, enabling them to take on more cases. This created a positive cycle where more cases led to more funding, and more funding led to more cases. Therefore, there has never been a shortage of disbursement funds in this aspect.
Continuing from last post, this time I will share about returns, terms, risks and other real numbers that you’d be curious about!
I told the lawyer that I could get steady double-digit returns elsewhere, so tell me his proposal.
He said, “In this industry, the interest rates for legal lending are similar. Both law firms and banks operate in the low teens range, so I can consider offering a similar rate. Initially, let’s start at 10% annual interest rate, and if you find the experience truly good, passive and want to lend more eventually, we can gradually increase the rate depending on the amount (as of now, after several years, it’s between 10-12%). As for the term, there are always cases that are close to conclusion, so I tend to use lender and my own capital to fund these mature claims and I also have my own cases settling each month, so we can start with a 12-month term. If you want it shorter, that can be arranged too.”
I was so Intrigued! I then asked, “So why did you say yes to the law firm’s funds in the past, and why are you reconsidering now?” He explained that when he had fewer cases in the past, the overall profit was not substantial, and the difference in profit sharing wasn’t significant. As the number of cases increased, and opportunities arose to buy cases in bulk from retiring lawyers, the overall profit became much more significant. With the number of cases at this scale, the time and effort he and his team had to spend on resolving these cases increased significantly, but the profit didn’t increase much due to the profit split with the law firm in the end. So, he decided it wasn’t worth it to take on new cases if the profit sharing model continued. He had to find a way to start borrowing disbursement funds outside the law firm from elsewhere, with lenders charging a flat interest rate instead of taking a piece of his profit in the end. This way, he could earn more, and lenders could make double-digit returns on their capital, making it a win-win for both parties.
I asked (initially wanting to be cautious and try it out quickly), “Is 6 months possible?” He said, “6 months is possible, but anything shorter might be challenging. The minimum is 10,000, enough to fund a simple case; anything less than that wouldn’t make sense.”
Alright, starting from a 10% annual interest rate, a 6-month duration, and a minimum of 10,000. I continued to ask, “How do we handle the interest? What’s the process at the end?”
He explained, “Considering I’m a busy lawyer and always in court for trials, I have no interest spending time to look for new lenders or calculating interest every month. So, I’m willing to prepay all interest up front at the beginning of each term. When the term has matured, if you want to renew, I’ll pay you the interest for the next term upfront as well. If you choose to redeem, I’ll return the full principal.”
I thought, “That’s convenient.”
Now, what about the risks?
He said, “There are two parts to this. One is the risk of the case, meaning, what if I as the lawyer lose. Firstly, the funds will only be lent to low-risk cases. What’s low risk? I only representing the plaintiff, the case has no dispute about liability, and it’s just a matter of negotiating the compensation amount and the settlement timer and timing with the insurance company. At the same time, there’s a product in the industry called ATE (After The Event) insurance. This insurance covers such low-risk cases. If the cases end up going to trial and the settlement amount in the end is not enough to cover my disbursement funds on this case (the purpose of the loan), this insurance pays the difference.”
I thought, “That’s insightful!” I asked, “What’s your success rate? Have you gone through the claims process with this insurance company?”
Till Next Time!
- Want to See How Much Other People Lent? – 2nd Batch in May 2024
- Want to See How Much Other People Lent? 1st Batch in May 2024
- My Journey on Passive Income that 99% Population Don’t Hear About (15)
- My Journey on Passive Income that 99% Population Don’t Hear About (14)
- My Journey on Passive Income that 99% Population Don’t Hear About (13)
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