Is Pre-Settlement Funding Right for Your Business? | Fora Financial Blog
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Is Pre-Settlement Funding Right for Your Business?
September 13, 2021
Is Pre-Settlement Funding Right for Your Business

Is Pre-Settlement Funding Right for Your Business?

The U.S. legal system is incredibly slow, complicated, and expensive. In fact, the time between filing a civil suit and receiving a settlement can take months or even years.

However, suppose that you sued an amusement park for damages resulting from an injury you suffered on their ride.  Due to the injury you suffered, you’re unable to work for several years. While you wait for your pending lawsuit to settle, you have living expenses and medical bills to cover. However, without work, your funds are low.

The pre-settlement loan exists to provide cash in this type of situation. On the surface, pre-settlement loans might sound like a no-brainer, but that’s far from the case.

In this blog post, we’ll explain what happens when you file a lawsuit and need to borrow money in the meantime. We’ll also highlight how business owners can utilize this funding.

What is a Pre-Settlement Loan?

A pre-settlement loan is a cash advance that lenders provide to plaintiffs in exchange for repayment plus interest and fees. The name pre-settlement loan is a bit misleading because it’s not technically a loan, but a cash advance.

Plaintiffs take out these pre-settlement funding to cover expenses during the legal case process before their case is settled. If a plaintiff doesn’t win their case, they typically aren’t responsible for paying back their advance.

Pre-settlement loans are a type of legal funding, also referred to as:

  • Lawsuit loans
  • Structured settlement loans
  • Non-recourse advances
  • Alternative litigation financing
  • Lawsuit advances

How to Qualify for Pre-Settlement Funding

As Nolo explains, pre-settlement funding companies only make advances to plaintiffs they’re confident will win their case. After all, these financing companies can’t recoup their funds if the plaintiff loses. If the plaintiff settles for a lesser amount than expected, they may not have to pay the entire advance back.

To mitigate risk, lawsuit lenders underwrite pre-settlement loans by evaluating the likelihood of the plaintiff winning. To do this, the lender needs all the information they can get about the case including:

  • The type of lawsuit

Personal injury accident victims, whistleblower, unsafe medical devices and employment law cases are the best candidates for pre-settlement funding.

  • Settlement potential and timeline

The greater the settlement potential, the more likely you are to qualify for pre-settlement funding.

  • The plaintiffs’ financial circumstances

Plaintiffs who are in dire financial straits and need to settle quickly are less likely to maximize their settlement. This makes them less attractive candidates for lawsuit lenders.

  • The expertise of the plaintiff’s attorney

The better the lawyer, the more comfortable a lawsuit loan company is extending an advance.

To qualify for pre-settlement funding, you’ll need to provide information about all of the above. Unlike traditional loans, your personal and business credit history won’t play a big role in the qualifying process.

How to Use Pre-Settlement Funding

Pre-settlement funding comes in the form of cash, and you can use it for anything you wish. However, you should be cautious about how you choose to use your advance.

Pre-settlement funding should be used to cover necessary expenses during the legal process. This gives you a negotiating advantage because you don’t have to rush into a settlement. Typically, the longer you can wait, the better chance you have to obtain a full settlement.

If you’re under financial stress, the defendant has more leverage to force you into a premature settlement. Therefore, it’s best to use pre-settlement funding for necessary expenses such as:

  • Rent, property tax, and/or mortgage payments
  • Homeowners or renters insurance
  • Auto and health insurance
  • Medical costs
  • Utilities
  • Auto or student loan payments

In rare cases, it may make sense to use pre-settlement funding for necessary business expenses. For example, if you pay for health insurance through your business, pre-settlement funds can be used for this. However, those funds have to be transferred from your personal account to your business, which can have tax implications.
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Pre-Settlement Loans for Business vs. Traditional Business Loans

Pre-settlement loans are generally extended to individual plaintiffs, not businesses. Although a business can be considered a plaintiff, this usually isn’t the case. Businesses can’t file personal injury or employment lawsuits.

In rare cases, businesses may file a whistleblower or unsafe medical device case. Still, most lawsuit funding companies design their products for individuals. Due to this, unlike a small business loan, the funds from a pre-settlement loan are treated like personal funds.

In addition to this key distinction, pre-settlement loans also differ from business loans in the following ways:

  • Pre-settlement funding is significantly more expensive than a traditional business loan. The average interest rate on pre-settlement advance is over 40 percent. 
  • Pre-settlement advances don’t always have to be repaid or may be repaid partially.
  • Traditional business loans require credit score checks; pre-settlement funding doesn’t.

Conclusion: Should You Pursue Pre-Settlement Financing?

Pre-settlement financing is best suited for a business owner who:

  1. Has suffered injuries due to the negligence of another party.
  2. Needs help covering expenses.
  3. Can’t qualify for a less expensive financing option.
  4. Is likely to receive a large settlement.

Even so, pre-settlement funding isn’t without risk. Regulations governing lawsuit lenders vary state by state and it’s often difficult to find a reputable lender. Also, depending on how it’s structured, pre-settlement loans can significantly limit your upside.

If you can tolerate the risk and you meet the criteria above, pre-settlement financing is an option to consider.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].