How to turn Litigation Finance in uncertain times?

Predictions of a global recession shortly appear increasingly accurate as short to medium-term economic shifts revenue uncertainty leading to a liquidity shortage are having an impact. Widespread concern around the future state of the global economy has law firms and other businesses alike ringing alarm bells. No matter the cause of the economic uncertainty, litigation finance can help moderate risk and better position recipients to weather an economic downturn.

Benefits for Businesses

For the vast majority of businesses that do not have the benefit of diverse, counter-cyclical revenue streams, the value proposition of litigation funding is acute: with no reasonable estimate available as to when we will return to “normal” conditions, litigation funding can provide much-needed capital to keep businesses functioning during abnormal times.

While it’s true that bank lending rates have dropped, traditional financing requires the borrower to make regular payments regardless of future financial conditions which may be an unpalatable arrangement in the face of so much revenue uncertainty. Litigation funding, by contrast, only requires payment in the event of a future success in the dispute. Thus, while the returns required on the financing provided are higher than what is typically sought by a lender offering a traditional recourse loan, litigation finance offers some significant risk reduction along with existing liquidity preservation benefits that traditional financing does not.

The benefits of litigation funding over traditional financing for businesses can run even deeper. By treating litigation claims as collateral, litigation funders can offer businesses financing by, in essence, monetizing a new class of assets that traditional financing typically overlooks (and that businesses typically treat as a cash-drain instead of an asset). Moreover, the accounting benefits of litigation funding may be especially helpful when quarterly profits are looking bleak: businesses can recognize litigation funding (which, depending on the size and strength of its affirmative claims, may be used as working capital for any number of expenses by the business) as revenue long before the claim is finally adjudicated and of course, the legal fees are no longer recurring costs on their ledgers because the funder is covering those expenses. Instead of its traditional treatment as a years-long drag on profits, strong affirmative litigation or arbitration claims can be converted into assets, with the potential for an even greater upside from a large future recovery.

Topics: Litigation Finance, Global Economy, Business Development

Work Cited: Bentham IMF, April 01, 2020