Litigation is expensive and many clients are not prepared for the financial investment necessary for filing a lawsuit. Litigation can take months or even years, during which attorney’s fees and other legal expenses continue. After the retainer fee, clients continue paying the attorney as the case progresses. Thus, it is essential to plan for protracted legal expenses. With a formidable legal team, however, clients bolster their chances of winning their case, warding off the threat of court-imposed fines at the case’s end.
Finding Money
The best way to pay for litigation is with personal funds. If you have the funds to independently pay for litigation, you should. While optimal, litigation is expensive and paying for it with just personal funds is not the best approach, or even possible for many clients. Luckily, there are other ways to finance litigation.
Selling Assets
The first, and perhaps easiest way to raise money, is through selling assets. If a client lacks liquid cash, they can sell physical and liquidate financial assets to raise funds. Whether it is jewelry or stock holdings, selling assets can be beneficial when looking for ways to finance litigation, even if the proceeds do not cover the full process of litigation.
Friends and Family
Another source of funds is friends and family. While many friends and family will be reluctant to loan money, depending on your relationship with your friends and family, they may be willing to help. This is especially true when friends and family have a stake in your business. Ultimately, borrowing from friends and family can be helpful because you are able to avoid bank fees and interest expenses.
Types of Loans
For involved cases requiring extensive litigation, personal assets and loans from family and friends may not be enough to cover legal expenses. Further, some clients may be hesitant to liquidate assets that are likely to appreciate. When facing this kind of litigation, clients may consider taking out bank loans. Banks offer several types of loans, but finding the right kind of loan for you will depend on the assets you can provide as collateral.
Home Equity Lines of Credit (HELOCs)
HELOCs offer borrowers substantial access to financial resources by leveraging the equity in their homes. Lenders calculate equity by subtracting the outstanding mortgage balance from the home’s current market value, typically allowing borrowers to access 80-85% of this equity. When applying for a HELOC, lenders assess factors such as credit history, income, and debt-to-income ratio. HELOCs often feature a 5–10-year draw period, during which borrowers can access funds, followed by a 10–20-year repayment period. HELOC interest rates vary. Secured by the borrower’s home, failure to repay could result in foreclosure by the lender. HELOCs are available at numerous national and local banks, subject to lenders’ eligibility criteria.
Securities-Based Loans
Securities-based loans are another loan option which may be optimal for some clients. These loans are secured through a brokerage firm and utilize the borrower’s publicly traded stock holdings as collateral. Securities-based loans allow clients to borrow against their stock holdings without selling them and offer liquidity. Such loans allow the borrower to benefit from dividends and appreciation on the equities without having to sell them. Brokerage firms determine how much they will lend based on the loan-to-value (LTV) ratio, which is the ratio of the loan requested and the value of the underlying security. A lower LTV ratio indicates lower risk for the lender and may help the loan get accepted. Securities-based loans may have lower interest rates than other types of loans (although LTV ratios impact interest rates). Interest rates may be fixed or floating. The brokerage firm sets the repayment terms, but these terms may be more flexible than other loans. Securities-based loans include an inherent risk from stock market fluctuation. If a portfolio falls below a certain value, the brokerage firm may issue a margin call requiring the borrower to provide additional funds to maintain sufficient collateral for the loan. Additionally, because the borrower’s portfolio is collateral, if the borrower does not repay their loan, ultimately the collateral could be liquidated for loan repayment. These loans are available through many local and national brokerage firms.
CD Secured Loans
Another loan option is a CD secured loan. For this type of loan, the borrower must first have the cash available to open a Certificate of Deposit (CD) at a bank. The lender holds the CD as collateral until the borrower has fully repaid the loan. Most lenders allow borrowing up to 100% of the CD’s value. CD secured loans generally have lower interest rates than home equity loans because they are secured by cash. Lenders set repayment terms, but terms vary among lenders. Some lenders give the option of monthly payments while others simply require the loan be paid off by the CD’s maturity date. Assuming borrowers have the cash to provide a CD or a friend or family willing to provide the CD as collateral, CD secured loans may also be available for borrowers who do not qualify for other types of loans and can even improve credit. Many national and local banks offer CD secured loans.
401(k) Loans
Clients can also request 401(k) loans to fund litigation. Not all 401(k) plans allow for loans, so you need to confirm with the administrator that your plan allows loans. 401(k) loans are usually capped at the lesser of $50,000 and 50% of the vested account balance. This is a general rule, however, and plans vary. 401(k) loans typically have shorter repayment terms than other loans. Repayment usually ranges from 1 to 5 years, with regular installments paid directly from the borrower’s paycheck. Although 401(k) loan proceeds are not considered taxable income, they must be repaid with after tax dollars. If the borrower is under 59½, they must repay the loan in the terms agreed upon or pay a 10% early withdrawal penalty. Additionally, if the borrower leaves their job for any reason, the remaining balance on their loan may become due immediately, subject to tax and penalties. Additionally, borrowing from a 401(k) has the opportunity cost of potential investment gains. If you have a 401(k), visit with your plan provider about loan options.
Art Secured Loans
A less common but still useful kind of loan is a loan secured by artwork. Art is less common as a collateral, but it is the best option for some. To obtain a loan secured by artwork, the borrower will need to find a bank who is willing to lend on art. The borrower then must have their art appraised, so the lender knows its value. Typically, lenders offer 40-60% of the art’s appraised value in loans. This is lower than other loans because of the art market’s volatility. Like other types of loans, terms can vary. To reduce their risk, lenders often require art to be stored in a secure facility for the duration of the loan, so the artwork is safe. When considering using art as collateral, lenders assess risk associated with the art including factors such condition, market demand, and artist reputation as well as the borrower’s credit history and ability to repay the loan. If the borrower cannot repay the loan, the lender can sell the artwork to recoup their investment. Art loans are specialized, so fewer firms offer them, although they are available.
Litigation Financing Firms
For those who are still unable to cover the costs of litigation, litigation financing firms may offer a solution. These firms provide funding to cover legal fees and expenses in exchange for a percentage of the settlement or judgment. While this option can be costly, it allows clients to pursue litigation without the immediate financial burden.
Conclusion
Litigation costs can be daunting for small businesses and entrepreneurs, but there are various ways to fund these expenses. Whether through personal funds, selling assets, borrowing from friends and family, securing loans, or turning to litigation financing firms, each option has its own set of benefits and risks. By planning meticulously and exploring all available avenues, businesses can manage the financial aspects of litigation while focusing on winning their case.
If you’re facing litigation and need expert advice on financing options, our team is here to help. Contact us today to discuss your situation and explore the best strategies for funding your legal battle.
Business Law Southwest. Business law that makes business sense.
