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Deferred Interest, Interest-Only or a Hybrid of Both?
Most litigation finance companies that offer lawyer financing and law firm funding advertise "no monthly payments". While deferred interest and no monthly payments may sound attractive at first, it is almost NEVER in your best interest. All it takes is some quick math and a little common sense and you'll be able to see for yourself, very clearly, why TriMark Legal Funding's interest-only and hybrid programs are a far better solution for your law firm, your cash flow and your bottom line.
What "no monthly payments" means is that a funding company will advance you money and then accrue interest on a deferred, compounding monthly basis until you repay the entire advance and all accrued interest. In other words, you will pay interest calculated on capitalized interest, calculated on top of more capitalized interest. The kicker? There is no cap or limit to how high it can go. It is unbelievably profitable for the funding companies who offer it - which is why they do it, but of course, it gets extremely expensive, very quickly. In fact, with accrued interest loans after just several years it is not unusual for a law firm to owe between THREE AND TEN TIMES MORE than the amount of the original advance! Three to ten TIMES MORE ... that can be a back breaker for any law firm. And if the firm can't pay off the entire balance, compound interest just keeps on accruing monthly until they can or until they go bankrupt. It's serious high risk without a safety net.
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TriMark Legal Funding wants to be the long-term funding solution for your law firm and your clients, so we treat you that way right from the start. We do not charge accrued-only interest on any of our attorney or law firm funding programs for several important reasons. First & foremost, accrued interest funding is a BAD DEAL for attorneys because it can cost a FORTUNE. Second, because of the excessive accrued interest buildup over time, funding companies cannot offer you nearly as much cash up front when you actually need it the most. Third, with compound interest, the final payoff amount is unpredictable, it increases every month and can be absolutely MASSIVE; delivering a potentially crippling or even lethal hit to your bottom line.
Fourth, and most importantly, because our interest-only program is 'pay as you go', the interest does not build up or capitalize so it ends up costing you a LOT less money over time - potentially hundreds of thousands or even millions of dollars less depending on the size and term of your advance. Best of all, your monthly interest payments AND payoff amount will always be fixed, predictable and budget friendly, and because the amount owed to us is less, our risk exposure is lower. That means you can get more cash up front with better rates, lower overall cost and greater cost effectiveness. Now that is a long-term legal finance solution that we think will keep you coming back to TLF each time you or any of your clients need legal funding.
Accrued Interest, Interest-Only or Hybrid?
TLF rarely funds accrued interest only loans because they usually cost the law firm a lot more money. We do make exceptions from time to time when circumstances warrant but our most popular attorney financing programs are our interest-only and hybrid options.
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A monthly compounding interest rate is used. Interest is calculated against the outstanding principle balance and is then capitalized (added to the principle balance due, thus increasing it). The next month, interest is calculated against the new principle balance and is capitalized again,increasing the outstanding balance due again. This continues on a monthly basis until the entire advance and all accrued and capitalized interest is paid off. This option has the advantage of requiring no monthly payments which is advantageous if your firm has no cash flow at all, but it also results in the highest fees and the largest payoff at the end.
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With this option you will make some amount of monthly payment to keep some of the interest from capitalizing. For example, we might do a $500,000 advance at 4% and have you make a 2% interest-only payment each month and the other 2% interest accrues and capitalizes. This option results in your balance increasing more slowly than the fully deferred option and allows you to pay some of your monthly interest expense from ongoing business operations.
Once you understand the math and the fact that interest-only litigation funding is just a better, safer, far more cost-effective way to go, there is really no reason to get involved with deferred interest loans.
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