Lawsuit loans represent an attractive and increasingly popular investment opportunity for those who are diversifying their portfolios into nontraditional assets. Also known as legal funding, lawsuit loans are an uncorrelated asset class with potential yields that far outpace the S&P 500.
At Silver Dollar Financial, we select cases to fund that plaintiffs stand the best chance of winning. We offer low management fees on your funds, allowing you to take home more of your investment. Find out if investing in legal funding is the right move for your portfolio.
Why Invest in Legal Funding?
Many people remain unaware that legal funding is an investment opportunity. Regular investors have only been able to take advantage of this opportunity in the last few years. Now as this class of investment gains popularity, it helps to learn more about it to see if this is the right opportunity for you.
Investors today are looking for new places to put money to work, especially with stocks at all-time highs and bond yields at historic lows. Nontraditional investments are fast gaining traction among portfolio managers who are looking for new sources of yield detached from broader economic trends. Legal funding presents an attractive option for such a strategy.
Unlike other speculative forms of investment, legal funding presents an attractive risk/reward profile. There is substantial transparency available to investors about every lawsuit they have the option to fund, as the evidence for each case is presented under oath. With this information, we can judge the likelihood that a plaintiff will win their case and that an investment will pay off.
How Does Legal Funding Work?
Legal funding works similarly to other types of loans, with some modifications. A plaintiff will bring a lawsuit forward against a defending party to recover damages from an incident. The plaintiff may expect to be awarded a substantial settlement should they win their case. However, the plaintiff can’t afford to wage a long legal fight and risks losing out on their settlement.
A lawsuit loan allows the plaintiff to borrow against their expected future settlement to pay for expenses they face now. They will repay this sum with interest once they win their case. However, should they lose, they get to keep the money they received and owe nothing in return.
Only the most qualified plaintiffs are eligible to receive a lawsuit loan. Riskier cases also face a higher interest rate, offsetting potential losses. This skew in the amount of risk investors can be exposed to makes lawsuit funding more attractive relative to other assets that offer an above-market return.
Who Can Invest in Legal Funding?
In most instances, the opportunity to invest in legal funding is limited to accredited investors. This is due to their nontraditional nature and the potential risks associated with this type of investment. Investors typically face a total binary of either a total loss or an above-market return. However, investors may have no opportunity to exit a case early, unlike with declining stock.
In order to be an accredited investor, you must meet the following qualifications:
- Your income is $200,000 or more, or you and your spouse have a combined annual income of over $300,000
- You have assets totaling $1 million or more
- You have obtained a Series 7, 65, or 82 license and hold it in good standing
Some legal funding companies have opened their portfolios to investors who are not accredited. They usually require that investors put down $5,000 to $10,000 as a minimum investment for any case. Even with these changes, legal funding remains an area where you’ll want to have a relatively high net worth before investing.
Is Legal Funding…Legal?
Yes, legal funding is legal across the United States. The modern legal funding industry began in Texas in the early 1980s and has since spread nationwide. Sixteen states have no current restrictions on legal funding. Several others have passed laws limiting how much interest can be charged for each case or what types of cases qualify for lawsuit funding.
Courts have consistently upheld the right of plaintiffs to seek out legal funding. In fact, legal funding has been found to increase equity in the legal system. Defendants who once could afford to drag out a case to avoid paying a plaintiff what they were owed now face plaintiffs who can resist their pressure tactics.
The lawsuit loan industry rests on sound legal footing and historical precedent. It’s just now opening to outside investors, who are quickly discovering the incredible opportunities in this asset class.
How Risky Is Legal Funding?
Just like with any other investment opportunity, legal funding carries the risk of a total loss on your investment. However, each case is vetted prior to being put up for funding. Only the cases that lawyers deem likely to win reach the funding stage. The outcome of the case will depend on the strength of its merits and the ability of the plaintiff’s lawyer to argue their case.
The amount of risk you face from your investment will depend on the structure of your investment. Some legal funding companies may give you the opportunity to invest in a fund that tracks multiple cases, which can reduce your risk. However, such a fund can cap your returns at lower rates than you would obtain by investing in individual cases.
Working with an experienced team of legal funding specialists can help you identify viable investment opportunities. At Silver Dollar Financial, we provide this service to all of our clients and guide them to the investments that make the most sense for their portfolios.
What Are the Pros and Cons of Investing in Legal Funding?
There are some major differences between investing in legal funding and other assets. You’ll want to keep these in mind before putting any of your money to work in lawsuit funding.
Advantages of Investing in Lawsuit Funding
- Higher yields than most other asset classes
- A small investor pool means less competition for desirable cases
- Greater transparency than other high-risk high-return ventures
- You can choose your level of risk exposure
Disadvantages of Investing in Lawsuit Funding
- Industry-wide, cases take an average of 26 months to resolve
- “Lumpy” returns
- Higher risk than other forms of investment
- Potential for a total loss of your investment
Legal funding can offer substantial returns, but this type of investment isn’t for everybody. If you have a long timeframe and an appetite for risk, then lawsuit funding could be an attractive investment for you. However, if you can’t afford to have a portion of your assets illiquid for an extended period, your money might be better elsewhere.
Should you decide to invest in legal funding, it’s advised that you keep your exposure at below 10% of your portfolio. While this asset class can provide dramatically outsized returns, your investment can easily take over a year to mature. You also run the risk of suffering from a total loss of your investment and won’t know the outcome until the case is resolved.
What Are the Potential Returns from a Legal Funding Investment?
Each case is different and your returns on one do not necessarily indicate your potential returns from another. However, many of those who have invested in legal funding report returns of 50% or more on their initial investment once all attendant fees are paid. Some cases can offer yields much higher depending on the risks associated with them.
Yields on legal funding are far ahead of asset classes that are tied to broader macroeconomic trends. Over the last thirty years, the S&P 500 has yielded a return of only 10.7%, compounding annually. Bonds yields face historic lows and have been declining in yield for the last forty years, reaching a bottom (for now) in 2020.
In an economy that favors risk and offers low to no returns on “safe” assets, legal funding presents an attractive way to obtain above-market returns.
Invest in a Partnership with Silver Dollar Financial
At Silver Dollar Financial, we’re committed to creating lasting, sustainable partnerships in the communities we serve with lawsuit loans in Georgia. Our commitment extends to our financial partners as well. We take on only the highest-quality cases, providing steady returns to our clients with minimal downside risk.
We offer full transparency to our partners about our investment opportunities. We can direct you to the cases that best match your investing style, whether you’re looking for a relatively stable yield uncorrelated with the broader market or if you prefer a higher risk strategy with potential rewards well above market yields.