For law firms that operate on a contingency fee basis, securing financing is often essential to fund ongoing cases. Litigation funding provides capital to cover legal costs, expert witnesses, and operational expenses while cases are in progress. However, the type of loan a law firm chooses—recourse or non-recourse—can have significant financial implications.
The primary difference between these two loan types is how repayment works if the firm's cases do not generate enough revenue. Non-recourse loans limit repayment strictly to the contingency fees collected from successful cases. If the firm’s cases underperform or lose, the funder takes the loss. Recourse loans, on the other hand, hold the attorney or law firm personally responsible. If case revenue is insufficient, the funder can pursue personal assets to recover the remaining balance.
Choosing between a recourse and a non-recourse loan requires careful evaluation of risk tolerance, financial stability, and case success rates. This article explores the key differences between the two, helping law firms make informed financing decisions that align with their business model and risk exposure.
What Are Recourse Loans?
A recourse loan in litigation funding gives the lender the right to seek repayment beyond the firm's contingency fee revenue if case outcomes fail to generate enough funds. In other words, if the firm's settlements or verdicts do not cover the loan balance, the lender can go after the attorney’s or firm’s personal assets, such as bank accounts, real estate, or other financial holdings.
Because funders assume less risk with recourse loans, they often offer lower interest rates and more flexible lending terms. Law firms with less predictable case success rates or those in need of larger funding amounts may find recourse loans easier to obtain. However, these loans come with a higher level of personal financial risk, as the attorney or firm is fully liable for repaying the loan regardless of case outcomes.
Pros of Recourse Loans
Law firms may benefit from recourse loans due to their lower costs and accessibility. Since the lender has multiple avenues to recover funds, these loans are often structured with lower interest rates and less restrictive qualification criteria. Attorneys may also find it easier to negotiate repayment terms with funders.
Cons of Recourse Loans
The biggest downside of a recourse loan is personal liability. If case revenue is insufficient to cover the loan, the funder can take legal action against the attorney or firm to recover the remaining balance. This could lead to the seizure of personal assets, putting the attorney's financial stability at risk.
Recourse loans are typically used when a law firm needs a large amount of funding but does not qualify for non-recourse options. While they provide access to essential capital, firms must carefully assess their ability to generate case revenue before committing to this type of financing.
What Are Non-Recourse Loans?
A non-recourse loan in litigation funding limits the lender’s ability to collect repayment strictly to the law firm's contingency fee revenue. If the firm’s cases do not generate enough money, the lender cannot pursue the attorney’s personal assets to recover the remaining balance. The risk is entirely on the lender, meaning that if the cases fail or settle for less than expected, the funder absorbs the loss.
Because non-recourse loans shift more risk to the funder, they typically come with higher interest rates and stricter qualification requirements. Funders carefully evaluate the law firm’s case portfolio, success rates, and potential settlement values before approving financing. Firms with a strong history of winning high-value cases may qualify for more favorable terms, while those with less predictable case outcomes may find non-recourse funding harder to secure.
Pros of Non-Recourse Loans
One of the most significant advantages of a non-recourse loan is limited liability. Since the funder can only recover what is generated from successful cases, the attorney’s personal assets remain protected even if the firm’s litigation results in lower-than-expected returns. This structure provides financial security and allows law firms to take on complex cases without fear of personal financial ruin.
Cons of Non-Recourse Loans
The primary downside is higher costs. Because lenders take on more risk, they charge higher interest rates and may impose stricter funding criteria. Law firms must typically show a strong track record of winning cases and securing settlements to qualify. Additionally, non-recourse loans may have lower funding limits, making them less suitable for firms that require substantial capital.
While non-recourse loans provide a safety net for law firms, they require careful evaluation of case potential and the ability to meet the lender’s eligibility requirements.
Key Differences Between Non-Recourse and Recourse Loans
Understanding how recourse and non-recourse loans apply in the context of litigation funding is essential for law firms seeking capital. The primary distinction lies in who assumes the financial risk if the firm's cases fail to generate enough revenue.
Borrower Liability
With recourse loans, law firms and attorneys are personally liable if contingency fees do not cover repayment. The lender can pursue personal assets, such as real estate or savings, to recover outstanding debt. With non-recourse loans, the lender can only collect repayment from successful case revenue, and the borrower is not personally responsible beyond that amount.
Lender Risk
In a recourse loan, the lender takes on less risk because they have multiple ways to recover the funds. They can claim case proceeds first and, if necessary, pursue additional repayment from the attorney’s assets. In a non-recourse loan, the lender takes on more risk, as they are only repaid if the firm's cases are successful. If cases settle for less than expected or result in losses, the lender absorbs the financial shortfall.
Interest Rates
Since recourse loans provide stronger repayment security for lenders, they typically come with lower interest rates. Non-recourse loans, on the other hand, have higher interest rates to compensate for the increased risk taken on by the funder.
Loan Terms
Recourse loans generally offer more flexible repayment options and higher funding, as lenders have additional security. Due to their limited recovery options, non-recourse loans often come with stricter terms, including lower loan amounts and tighter repayment schedules.
Qualification Criteria
Funders assess risk differently for each loan type. Recourse loans may have less stringent approval requirements, making them accessible to a broader range of law firms. Non-recourse loans require strong case portfolios, proven success rates, and high-value expected settlements to qualify.
Impact on Law Firm Finances
A recourse loan exposes the attorney or law firm to financial risk beyond their case outcomes, potentially leading to personal asset loss in case of default. Non-recourse loans provide greater financial protection but require firms to carefully evaluate whether the higher costs and stricter requirements align with their business model.
How to Choose Between Recourse and Non-Recourse Loans
Law firms seeking litigation financing must carefully consider which loan type aligns with their financial situation and risk tolerance. Because these loans directly impact how the firm manages case expenses and long-term financial health, selecting the right structure requires a strategic approach.
Financial Stability
A law firm’s financial position plays a major role in determining which loan type is more suitable. Firms with a strong case pipeline and predictable settlement outcomes may feel comfortable taking on a recourse loan, knowing they can reliably cover repayments. However, for firms handling high-risk or unpredictable cases, a non-recourse loan provides protection by ensuring the attorney’s personal assets are never at stake.
Risk Tolerance
Some law firms are comfortable with personal liability, while others prioritize financial security. A recourse loan may be preferable if a firm is willing to assume greater responsibility in exchange for lower interest rates and easier approval. For attorneys who want to protect personal assets and limit exposure to case-related financial risks, a non-recourse loan is safer, even if it comes with higher costs and stricter funding criteria.
State Regulations
State laws impact how recourse and non-recourse loans are enforced, particularly in law firm financing and litigation funding. Nonrecourse loans are more common or better protected in some jurisdictions, while others allow funders to pursue broader collection rights. Before committing to a loan type, law firms should review their state’s legal framework and consider how these regulations affect repayment obligations.
Type of Cases the Firm Handles
The nature of a law firm's case portfolio can determine which loan type makes the most sense. Firms specializing in mass torts, class actions, or large-scale commercial litigation—where case outcomes can be uncertain and take years to resolve—often prefer non-recourse loans to mitigate risk. Conversely, firms with a history of steady contingency fee revenue from smaller, more predictable cases may find recourse loans a viable option due to their lower borrowing costs and flexible repayment terms.
Managing Recourse vs. Non-Recourse Loans
Once a law firm secures litigation financing, effective loan management is essential to maintaining financial stability. Understanding repayment schedules, interest structures, and default provisions helps firms anticipate cash flow needs and avoid financial strain. Since case settlements serve as the primary source of repayment, firms should continuously monitor their case portfolio performance to ensure expected revenue aligns with loan obligations.
For firms with recourse loans, maintaining financial reserves can help mitigate personal liability risks if case revenue falls short. Those with non-recourse loans should carefully track projected settlements to ensure their funding strategy remains sustainable. If financial conditions change, refinancing or renegotiating loan terms may be an option to improve repayment flexibility. By proactively managing their financing, law firms can reduce risk, maintain control over debt obligations, and optimize funding for case success.
Bottom Line
For law firms relying on litigation financing, understanding the differences between recourse and non-recourse loans is essential for making informed financial decisions. These loan structures determine who bears the financial risk if case outcomes do not generate enough revenue to cover repayment.
Recourse loans offer lower interest rates and more flexible terms, but they come with the risk of personal liability. If the firm’s cases do not generate enough revenue, the funder can pursue the attorney’s personal assets for repayment. Non-recourse loans, on the other hand, provide greater financial security, as repayment is limited strictly to contingency fee revenue, but they come with higher costs and stricter qualification requirements.
Choosing the right loan structure depends on financial stability, risk tolerance, and the types of cases a firm handles. Firms with predictable case outcomes and strong contingency fee pipelines may benefit from recourse loans, while those handling high-risk or long-duration cases may find non-recourse loans more suitable despite the higher costs.
No matter which financing option a law firm chooses, effective loan management is critical. Monitoring case revenue, maintaining financial reserves, and understanding repayment terms ensure that a firm remains financially stable and avoids unnecessary risks.
FAQs
What are the tax implications of recourse vs. non-recourse loans?
With recourse loans, if a portion of the debt is forgiven, the forgiven amount is generally considered taxable income. With non-recourse loans, the lender can only recover funds from case revenue, and any shortfall is typically not taxable, as the borrower was never personally liable for the debt. However, tax laws vary, so it’s best to consult a financial professional.
What happens if a law firm defaults on a recourse or non-recourse loan?
If a law firm defaults on a recourse loan, the funder can pursue the attorney’s or firm’s personal assets to recover the remaining balance. With a non-recourse loan, the lender can only claim repayment from the firm’s contingency fees, and if the cases fail, the lender absorbs the loss.
Which is harder to qualify for: recourse or non-recourse loans?
Non-recourse loans are harder to qualify for because the lender takes on all the risk if cases fail. Funders require firms to have a strong case portfolio, proven success rates, and high-value expected settlements to be approved. Recourse loans have easier qualification criteria since funders have multiple ways to recover their money.
How can a law firm determine if a loan is recourse or non-recourse?
The loan agreement will specify whether a loan is recourse or non-recourse. If it’s unclear, attorneys should review the terms carefully or consult a financial advisor. In non-recourse financing, the funder’s repayment is strictly limited to case revenue, whereas recourse loans allow funders to go beyond case proceeds to recover unpaid balances.
