How Litigation Finance can Help your Business
The decision to take legal action can be tough. Even if you’re sure that you, or a company you represent has been harmed, the legal proceedings are likely to be prohibitively expensive. If the offender is a well-resourced company or corporation, they will outspend you at every step of the way. The deck is stacked against you—it is unlikely that you will come out ahead, even if you have a strong case. However, it doesn’t have to be that way—litigation finance can be a game changer in the litigation equation.
What is litigation finance?
Litigation funding or finance occurs when a third party with no direct interest in the proceedings, funds all or part of a legal dispute or arbitration. The lender usually covers the direct legal costs, such as lawyers’ fees. For small businesses, it is a way to fund claims they do not have the resources to finance on their own. For larger companies, it is a way to offset the risk of litigation.
The field has been growing rapidly in the past decade. A survey of more than 500 senior finance professionals from U.S., U.K., and Canadian companies conducted by the leading litigation finance firm Burford Capital in 2019 found that three-quarters (74.8 percent) reported their company had increased its use of litigation finance services in the past two years. The trend is likely to continue in the near future.
Litigation finance is a safe bet for the borrowers as it is usually non-recourse—if there is no recovery from the dispute, the borrower has no obligation to pay any return on the investment. For lenders, there is significant risk involved—if the client loses, the investor loses the entire investment. However, if the client wins, the investor receives either a percentage of the settlement award, or a multiple of the advance, as pre-determined in the financing agreement. Since interest rates are extremely low, investors are looking for creative new funding venues. Litigation finance, even though it is non-recourse, is an attractive opportunity.
Litigation finance can change the dynamics between small businesses and large corporations. Small businesses are often hesitant to take legal action against large companies because they know that the offenders have unlimited resources to fight the claim. Even if they take initial action, they are likely to compromise prematurely on a small settlement and not hold out for a larger amount for fear that they will end up with nothing. Litigation financing changes the power balance—when the defendant realizes that the claimant has financing, it strengthens the his or her bargaining power.
Merit assessment and expertise
Litigation funders are successful only if they can identify and invest in the cases that have a good chance of winning. Therefore, most reputable litigation funders have a professional legal department staffed by experienced legal professionals. When a claimant applies for funding, the lender reviews the claim, at no cost to the claimant. This is a valuable service in and of itself, as it helps the claimant assess the probability of success should they decide to proceed with the litigation. It ensures that the claimant will not lose money on a frivolous lawsuit that has little chance of succeeding.
In addition, litigation funders are usually well connected, and can connect the claimant to legal expertise and specialized counsel the claimant may not have been able to access independently. The specialized legal counsel further improves the chance that the litigation will succeed.
Why not take a bank loan?
Bank loans are recourse loans, meaning that the borrower needs to pay back both the principal and the interest, regardless of the outcome of the dispute. Since banks do not have the tools or expertise to assess the merit of the claim, they generally require the borrower to provide collateral and personal guarantees for all litigation loans, making them too risky for most borrowers.
Litigation finance experts have the expertise to assess the merit of the claim—if they do not believe that the claim has merit, they simply choose not to fund it. If their detailed assessment leads them to the conclusion that the case has a good chance of success, they direct the best legal resources towards its successful resolution. Their unique expertise and resources provide them with enough confidence to offer non-recourse finance, making it a much safer bet for the client.
The deck is normally stacked against claimants taking legal action against companies or corporations. Litigation finance reshuffles the cards. It provides a free, accurate assessment of the merit of a claim, minimizes the claimant’s financial risk, and gives the claimant access to expert legal resources.
For funders, litigation finance offers an exciting new way to diversify their investment portfolio and earn significant returns on investments.