How to Work with Legal Funding Brokers
January 1, 2021
Origination is the lifeblood of every legal funding business, and brokers can provide a valuable, potentially expensive source for origination, and can help you build and balance your portfolio, providing access to different case-types.
This post will review many of functions of brokers in the funding industry and provide some useful tips on working with them.
What role do brokers play in legal funding?
It's all in the name, really. The basic definition of a "broker" is one who acts as an intermediary in a transaction. Unsurprisingly, brokers in legal funding perform a similar function to brokers in any other industry. In short, brokers are lead generation experts.
On a fundamental level, brokers operate via high-volume lead generation. They sometimes source cases through personal relationships with attorneys, but much more frequently they use search engine optimization (SEO) and search engine marketing (SEM) tactics. Thus, compared to other industries, brokers in this business typically have valuable SEO/SEM expertise and are able to generate many leads by this leveraging these abilities.
In a typical arrangement, brokers handle all communication between plaintiffs and law firms. The basic process may look something like this:
- A broker will suss out the basic quality of a lead (probably by using some of the plaintiff communication tactics we've touched upon before).
- If it's a good lead, they will contact the plaintiff's law firms for documents and then collect the necessary documents.
- They will then decide which funding company to send a lead to.
- If it's a good match for both parties, brokers will often close the funding agreement with the plaintiff/law firm.
Funding companies are responsible for underwriting during this exchange above; upon deciding to invest, they will send money to a plaintiff and eventually service the investment to increase the likelihood of collecting. Fair Rate Funding provides a handy and extensive list of all the different functions a broker should fill, including:
- Compile the necessary paperwork from the law firm
- Monitor the progression/status during case processing and underwriting
- Field the plaintiff's calls and questions
- Facilitate the signature process with the plaintiff and his/her attorney if there is an approval
- Field questions regarding the contract and its terms for funding
- Secure and forward the contract to the funding company
- Confirm the client receives the cash advance
Who are the top brokers?
Good question! And a hard one to answer.
There isn't really any reliable data on this topic, and it isn't always clear who is strictly brokering versus funding & brokering. That the line demarcating brokers from funders is blurry is a unique wrinkle in the legal funding industry. Many brokers aspire to become funders, but often lack the capital needed to get off the ground, and many funders broker cases, in addition, to directly offering advances.
The two most common reasons for a funder broker out cases is that 1) a plaintiff is looking for additional money and the funder is not able to advance anymore 2) a lead is outside of a funder's investment thesis i.e. case type or jurisdiction they don't fund. One might be able to determine some of the big players via keyword analysis -- as discussed in Top SEO Tips & Terms for Legal Funders
Tips for working with brokers
1. Set and Track Metrics
Before working with a broker in earnest, you should determine what you want out of the relationship, and set proper expectations.
Working with brokers is typically an informal arrangement with little to no signed paperwork, but it is wise to put some structure around it helps both parties. The best bet is to marry data and experience to make sure you set yourself up for profitable business relationships.
Start by setting up internal metrics to determine the ideal (i) target approval rate and (ii) target funded rate. This way, if the broker starts missing these targets, you will be able to notice this dip and start digging into why that is the case.
Accordingly, on your first call with a new broker, be clear on the following factors, and regularly send follow up emails to make sure you are both on track
2. Be Clear on Fee Structure
This is, of course, all a broker really to know: how will they be paid?
- Upfront Fees: a percentage of total funding or a percentage of "new money" (see below for definition)
- Backend: a backend fee, alternatively or in addition to money up-front, for when a case returns a payout
In practice, paying a broker an upfront commission is much more common than tying anything to the backend. You should think long and hard about what behavior upfront-fee-only structures incentivize in your broker partner.
It's also standard to see upfront commissions ranging from 10-20% the funding amount. Although, there is typically some discussion on whether the commission is paid on a percentage of the money funded to the plaintiff or rather on the total funding amount.
There are so many variations in legal fundings that it's important to be very clear straightaway. For example, a plaintiff may receive $1,000 in a new funding, but, due to prior investments on that claim, the actual total funding amount could be $10,000 ($1,000 "new money" and $9,000 "buyout" or "old money").
3. Define your lead-criteria
1. Who is responsible for collecting documents and getting the contract completed?
2. Do they provide all leads with documents?
- If so, what happens if your underwriter needs additional documents that weren't included in the initial package?
3. Do they provide leads without documents?
- If so, how does the process change?
- Do they get leads for a particular case type you specifically do or don't want to see?
- Do they have different rates for case types?
Whether or not you like the idea of a middleman coming in and taking a percentage, brokers can be a valuable origination tool for funding companies. Of course, it is expensive, and, because they typically get paid up front, brokers are focused more on getting cases funded than recouping a return from that funding. You have to determine what makes the most sense for you and whether you will be able to really take advantage of a broker's efforts in lead generation and case management.