Learn about Litigation Finance
What Is Litigation Finance?
Litigation finance is a specialized type of financing in which third parties provide funding to litigants or law firms where repayment is secured by the recipient’s interest in a legal claim. Financing is typically only repaid upon the successful outcome of the underlying legal claim(s) although a wide variety of litigation financing structures is available. Commercial litigation financing (as opposed to consumer litigation funding) is available only to businesses and law firms in connection with commercial litigation or arbitration.
Commercial litigation finance enables your business to minimize the negative financial impact of litigation. A third party litigation funding arrangement not only serves as a source of liquidity but also affords relief from the budgetary constraints and the P&L impact associated with major litigation expenditures. When your company takes advantage of this form of financing, you enjoy financial benefits similar to contingent fee engagements while continuing to work with your preferred law firm. Your business can also use litigation finance to unlock the value of legal claims and generate new sources of liquidity for your core businesses. Businesses are using litigation finance to:
- Fund fees and expenses to assert or defend legal claims
- Leverage legal claims to generate capital for purposes unrelated to the claims
- Monetize or sell uncollected judgments
- Hedge against the risk of an adverse legal outcome
Lawyers who are knowledgeable about litigation financing are able to offer their clients more alternatives for managing legal budgets, thereby facilitating engagements for their law firm and strengthening relationships with their clients. Commercial litigation funding also offers law firms tools to manage their own finances and to reduce risks.
Law firms are using litigation finance to:
- Accommodate clients who seek contingency fee economics
- Expand litigation client base to include start-ups and other growth stage companies
- Leverage contingent fee portfolios to preserve capital and de-risk the firm’s balance sheet
- Accelerate receivables from traditional hourly or contingent fee engagements
- Obtain debt facilities with greater flexibility (versus bank offerings)
How Is Litigation Financing Obtained?
Numerous litigation funding providers are currently active, each with their own particular financing criteria and approach. Identifying potential funding providers based on their reputations and transactional preferences is an important initial step.
After approaching potential funders with a financing opportunity, the funders must carefully assess the strength and value of the legal claims underlying the transaction because, in almost every case, the litigation funder will only recoup its investment upon a successful outcome of the claim(s). The parties will then negotiate the financing terms, and the funder offering the most attractive terms will be chosen and will receive exclusivity in order to complete its due diligence.
Once the diligence requirements are satisfied, the financing documentation will be executed and the transaction will be consummated. For more information, please review these pages:
The process of exploring and completing a commercial litigation financing transaction can be time-consuming and complex. Your company should expect your key executives and outside litigation counsel to invest significant time on this process. With careful preparation alongside the expert team at Westfleet Advisors, you’ll significantly increase your chances of a timely and successful transaction. Our list of frequently asked questions may be useful for additional information.
For a more detailed review of your needs, please contact us directly or call (615) 312-8255. We look forward to assisting you.