Why Litigation Funding Should be on Your Company’s Radar?

When a company thinks about engaging in litigation, it is rarely a welcome thought. After all, litigation can be unpredictable and costly, and when paid for by the company itself, can affect cash flow and consume profits. Litigation funding can dramatically alter this picture. Working with a funder, a company can preserve its cash, uncover and maximize its litigation assets, protect the business from predatory competitors and reputational damage, and resist the financial pressure to settle a case early for pennies on the dollar. In the event of a successful settlement or judgment, the funder generally receives a multiple or percentage of its investment from the proceeds. On the other hand, if the case is unsuccessful, the funder receives nothing.

• Litigation funding also helps companies:

Manage Cash Flow: Working with a funder to finance litigation allows a company to use its cash for its operations and growth rather than the costs associated with litigating its dispute. When a claim is successful, revenues can be recorded without the company having expended any cash along the way. If the claim is unsuccessful, the company pays nothing because the capital was provided by the funder on a non-recourse basis.

Improve the Balance Sheet and Income Statement: Litigation poses a particular problem for EBITDA-focused companies because of its impact on the balance sheet and income statement. Typically, litigation expenses must be recorded as soon as they occur, yet a potential recovery cannot be counted as projected revenue. And if a case is successful, the windfall is treated as special income that cannot be used in the company’s profit calculations. With funding, working capital provided by the funder can be recognized long before a potential recovery. At the same time, the funder is covering litigation expenses, allowing those costs to disappear from the balance sheet and income statement. In the end, litigation is transformed from a drag on profits into a potentially lucrative asset that pays dividends up front with the funder’s investment and at the end of a case from the proceeds from a potential recovery.

Uncover an Asset:  Good corporate governance requires that a business explore opportunities to monetize its assets. And with funding, strong, affirmative legal claims have the potential to be transformed into a bankable corporate asset. Funding allows companies to pursue plaintiffs-side claims without risking their finances on the ongoing expense of a lengthy case. Companies working with funders can monetize a case from the outset, substantially reducing their out-of-pocket costs and maximizing the potential value of a settlement or judgment.

Topics: Litigation Funding, Asset, Balance Sheet, Cash Flow

Work Cited: Bentham IMF, June 03, 2020