Contingency Fee Law Firm Funding: Case-Cost Lines, Portfolio Loans and Fee Advances

By MercFinancial · Published 2026-10-21

Contingency fee law firm funding comes in three structures tied to the docket: case-cost lines, portfolio loans and post-settlement fee advances. What each costs, how ethics rules shape it, and the tax treatment of case costs.

Contingency fee law firm funding comes in three structures, all tied to the docket rather than to monthly revenue: a case-cost line that pays experts, records and filing fees as they arise, a portfolio loan secured by the expected fees across the whole caseload, and a post-settlement advance against an earned fee that is waiting on payment. Specialty legal lenders and litigation finance companies write them, a small number of banks with law-firm groups write the first two, and all of them are structured as loans to the firm so that the ethics rules on fee sharing are respected. Whether a given firm qualifies depends on the funding source and on how well the docket can be verified.

This guide explains each structure, what it costs and how the cost is calculated, the ethics boundaries that shape the paperwork, the tax treatment of advanced case costs in general terms, an illustrative example, and the documents a contingency firm needs ready.

The lender funds the costs and the firm keeps the fee, which is the whole point of structuring it as a loan.

Why contingency practices need capital tied to the docket

A contingency firm is paid at the end. Between intake and resolution it carries salaries, rent and the costs of proving the case, and the larger the matter the longer and more expensive that stretch is. A single product liability case can require several experts, thousands of pages of records and a trial budget, and a mass tort docket multiplies that across hundreds of claimants before the first settlement. Rule 1.8(e) permits the firm to advance those costs with repayment contingent on the outcome, which is good for clients and hard on the firm's cash.

Conventional lenders read that cash flow as a problem, for reasons set out in why banks decline law firms. The lenders built for contingency work see a portfolio of claims with estimable values and dates, a firm with a record of turning claims into fees, and a borrower that cannot sell equity. So they lend against the docket, and the structure depends on where in the case life cycle the money is needed.

The three structures for contingency fee law firm funding

Each structure funds a different moment in a case, and a mature firm often holds more than one.

Case-cost lines are the workhorse: the lender opens a facility, the firm draws against approved matters, and each draw is tracked to its case. Portfolio loans are larger and cross-collateralized. The lender takes a security interest in the firm's fee entitlements across the caseload and underwrites the mix, the stage distribution and the resolution history, which suits firms with dozens of matters and a need for growth capital. Post-settlement advances are the fastest, because the fee is earned and the only question is timing. A revolving structure that blends these needs is described in law firm lines of credit.

What contingency fee funding costs, and how the cost is calculated

Cost follows risk and time, and each structure calculates it differently. A case-cost line charges interest on the costs actually drawn, from the day of each draw until the case pays, so a matter that resolves in six months costs a fraction of one that takes three years. Rates sit above a bank line because the lender is taking litigation risk.

A portfolio loan charges interest on the outstanding balance, sometimes with a fee at each resolution, and non-recourse versions, which look only to the fees and never to the partners, cost more than recourse versions. A post-settlement advance is often priced as a flat or monthly fee for each month the settlement remains unpaid.

Two comparisons keep the cost in proportion. The first is against the fee: interest on $200,000 of costs over eighteen months is small next to a seven-figure fee and large next to a loss, so a lender's willingness to fund a matter is itself a second opinion on the case. The second is against the alternatives: declining the case, or bringing in co-counsel for a share of the fee. Daily-draft products sold as working capital are the wrong tool for a docket that pays in years, and the warning signs are in merchant cash advance red flags.

Ethics boundaries that shape the paperwork

The rules of professional conduct do not prohibit a law firm from borrowing. They prohibit sharing legal fees with a non-lawyer and letting a non-lawyer direct a lawyer's judgment, under rules modeled on ABA Model Rule 5.4, and the funding documents are drafted around those lines.

• Interest, not a fee share. Repayment is principal plus interest and fees, never a percentage of the recovery, even though the lender sizes and prices against expected fees.
• No control. The lender has no say in strategy, settlement or case selection.
• Security in the firm's rights, not the client's claim. The lender takes a security interest in the firm's fee entitlements and accounts, not in the cause of action.
• Confidentiality. Docket diligence uses matter summaries and aggregated data, with client consent where a lender needs more.
• Passing interest to clients. Some jurisdictions permit a firm to charge a client the interest on costs advanced for that client's case with informed written consent, and others restrict it.

Ethics opinions in a number of jurisdictions have treated a loan to the firm on these terms as permissible. Consumer legal funding paid directly to a client, and court disclosure of litigation funding, are separate matters regulated differently by jurisdiction, so confirm your own rules with ethics counsel before closing.

Tax treatment of advanced case costs, in general terms

Advanced client costs are usually not a deduction in the year the firm pays them. Under the general position the IRS has taken, costs a contingency firm advances under an agreement that entitles it to reimbursement from the recovery are loans to the client, carried as a receivable and deducted only when written off as uncollectible. The Ninth Circuit's Boccardo decision allowed a current deduction where the fee agreement was a gross fee arrangement with no right of reimbursement, and whether that reasoning applies depends on the firm's fee agreement and jurisdiction.

Interest paid on a case-cost line or portfolio loan is generally a business expense, subject to the usual limits. None of this is tax advice. Confirm the treatment of a given firm's costs and interest with a tax adviser who knows the fee agreements.

An illustrative case-cost decision

Illustrative example, round numbers only. A personal injury firm takes a products case it expects to resolve in about two years, with a projected fee of $900,000 and projected costs of $200,000. Option one is co-counsel who will fund the costs for forty percent of the fee, a split the rules allow among lawyers with the client's written consent. Option two is a case-cost line that funds the $200,000 as incurred, with interest accruing from each draw. On those assumptions the split costs $360,000 of fee, while two years of interest costs a fraction of that, and the firm keeps the case. If the case loses, the split costs nothing and the loan still has to be repaid. That trade is the whole decision, and it is why lenders underwrite the docket. Nothing here is a term offered by MercFinancial or any funding source.

Where MercFinancial fits

MercFinancial is a commercial funding brokerage in Houston, not a lender. For a contingency firm, a funding specialist reads the case inventory, the resolution history, the cost-advance schedule and the collected fees, and works out whether the need is case costs, portfolio working capital or a bridge to a settlement payout. The file then goes to the funding sources among more than 160 wholesale and institutional relationships whose credit policy allows law firms and that structure. Offers are compared on rate, fees, recourse, reporting and control terms, and the firm is told plainly if nothing fits. Every approval and every term is the funding source's decision. The other law firm funding guides cover the other structures, and the business funding programs page lists what is placed.

Frequently Asked Questions

What is case cost financing for law firms?

Case cost financing is a line of credit or loan that pays the out-of-pocket costs of contingency matters, such as expert witnesses, medical records, depositions and filing fees, as they arise. The firm draws against approved cases, interest accrues on each draw, and the balance is repaid when the case resolves. Specialty legal lenders and some banks with law-firm groups offer it.

Is contingency fee funding considered fee sharing with a non-lawyer?

Not when it is structured as a loan to the firm. Rules modeled on ABA Model Rule 5.4 bar sharing legal fees with non-lawyers, so the lender is repaid principal, interest and fees rather than a share of the recovery, takes no control over the cases, and holds a security interest in the firm's fee entitlements rather than the client's claim. Confirm your state's rules with ethics counsel.

Can a law firm pass the interest on case-cost financing to the client?

It depends on the jurisdiction. Some states permit a firm to charge a client the interest on costs advanced for that client's matter when the engagement agreement discloses it and the client consents in writing. Others restrict or prohibit the practice. Lenders do not require pass-through, and many firms absorb the interest as a cost of taking the case. Check your state's rules before drafting the engagement letter.

Are advanced case costs tax deductible for a contingency firm?

Generally not in the year paid. Costs advanced under a fee agreement that entitles the firm to reimbursement from the recovery are usually treated as loans to the client and deducted only when written off. A Ninth Circuit decision allowed a current deduction under a gross fee agreement with no reimbursement right. The answer depends on your fee agreement and jurisdiction, so confirm with a tax adviser.

What is a portfolio loan for a law firm?

A portfolio loan is a larger facility secured by the expected fees across a firm's whole docket rather than by one case. The lender reviews the case mix, the stages and the firm's history of resolving matters on forecast, then advances working capital that is repaid as fees come in across the portfolio. Litigation finance companies and a few specialty banks write them for firms with a sizable docket.

MercFinancial is a commercial funding brokerage in Houston, Texas. MercFinancial is a broker, not a lender: every loan is made by a third-party funding source, every request is subject to that source's underwriting and credit approval, and loan amounts, advance rates, interest rates, terms, fees, collateral and guaranty requirements vary by funding source and borrower and are not guaranteed. Nothing here is a commitment to lend or an offer of credit, and financing is for business purposes only. Any example in this guide is hypothetical and illustrative; actual terms and outcomes vary. Rules of professional conduct in every state restrict fee sharing with non-lawyers and non-lawyer ownership of law firms, and litigation funding is regulated or disclosed differently by jurisdiction; nothing here is legal advice and financing availability depends on the funding source's policies. This guide is educational only and is not legal, tax, accounting or investment advice.