Over the last few years there’s been an explosion of third-party commercial financing options. Familiarly known as “Buy Now, Pay Later” and offered by companies like Klarna, Affirm, and Sunbit, these services provide short-term loans to consumers to purchase everything from furniture to event tickets.
So where has this new option come from? Installment plan lending is not new. Over the last few years a number of online financial technology companies have developed systems that integrated installment plan lending into the payment flow of online shops, allowing a consumer to receive instant credit at the point of sale and pay for a purchase later, making payments on an agreed schedule. Historically, a consumer would have to go to a bank or some other lender for a small short-term loan and then return to the seller with those funds. Buy Now, Pay Later is novel in that it combines lending and instant processing right at the point of sale.
How is Buy Now, Pay Later different from litigation funding or litigation finance?
Litigation funding or litigation finance has been around for some time – particularly in contingency practices – but with the rise of technology-driven data analytics and a prominent litigation funding case in the news a few years ago (Bollea v. Gawker) the term and the practice have gained greater attention.
The difference between traditional litigation funding and Buy Now, Pay Later isn’t entirely clear. There is no strict definition of “litigation finance.” Taken on its face, litigation finance is simply the provision of resources for a party to pay for litigation. By that definition, Buy Now, Pay Later would fit that definition if the borrowed funds are used to pay for a lawsuit. That said, more commonly held definitions of the term litigation finance suggest that litigation finance funds are offered on a non-recourse basis more as a form of an asset purchase or even venture capital. Similarly, in litigation finance, the funder often isn’t eligible to collect on the funding unless the plaintiff recovers money from the funded lawsuit.
A host of other elements often accompany litigation finance including consent by both the plaintiff and the plaintiff’s attorney to accept the funding and legal documents formalizing that agreement.
Litigation finance can get complex quickly. As a result, we’ve mostly excluded it from this post - and from The Confido Legal Third-Party Finance Decoder available below. This post and the guide below are designed to be the starting point for you to dig in on the permissibility of using Buy Now, Pay Later funding in your practice.
Why Offer Buy Now, Pay Later
As mentioned, there are many different options for clients to finance their legal fees.
Payment Plans: Firms can put their clients on payment plans. These plans can take the form of payments upon reaching certain milestones in a case, or simply regularly scheduled payments to cover ongoing work. Payment plans can be a great way to expand your pool of potential clients, but there is always the risk of non-payment if a card declines, a bank account runs out of money, or a client simply skips town. (If you want to dig in on payment plans, we had Chicago attorney Russell Knight offer his thoughts on payment plans on the Financially Legal blog.) While payment plans are convenient for clients - and, to some degree, for lawyers - they essentially turn the lawyer or law firm into the bank. The firm must assess the non-payment risk of every client, evaluate the client’s cash flow situation, and assume responsibility for collections.
Credit Cards: Law firms have been accepting credit cards for decades. It’s easy to get lost in the confusing landscape of airlines miles, airport lounge access, and other perks but the fact is that credit cards do provide credit to clients and can help allow them to pay otherwise unaffordable legal fees. However, credit cards are generally the realm of the already wealthy and creditworthy. Unfortunately, there are many individuals in need of legal help – who can pay for it – but who aren’t necessarily wealthy or creditworthy. ( If you’re curious about accepting credit cards at your firm, you’ll get all you need and more from the Confido Legal Complete Guide to Payment Processing.)
Buy Now, Pay Later: Buy Now, Pay Later solutions fill a gap that payment plans and credit cards don’t necessarily address. As discussed, payment plans force lawyers and law firms to serve as the bank for their clients. Similarly, not every client may have a credit card – still others may simply choose not to use a credit card (note that credit utilization has generally been falling in the United States) – so, offering an option beyond payment plans and cards has to potential to help a firm convert an additional group of prospects into buyers.
We at Confido Legal strongly believe that firms and clients benefit most when firms offer clients a variety of options to pay. Firms invest significant dollars to get clients in the door. It’s a waste of those resources to have a would-be paying client walk out the door simply because the firm doesn’t offer payment plans (i.e. doesn’t want to be the client’s bank), the client doesn’t have a credit card, or because the firm won’t offer third-party funding.
That’s why we're pleased to announce the Confido Legal Third-Party Finance Decoder. The decoder will help you quickly find the rules and opinions related to Buy Now, Pay Later in your particular state so you can better understand the benefits of offering financing options to your clients. Just fill out the form below and we'll send a copy to you.
