What Small and Medium-Sized Businesses Need to Know about Litigation Funding
Litigation funding can benefit businesses of all sizes, but small and medium sized companies can find particular value in using financing for their cases. For example, small companies are often hampered by the high cost of litigation especially if they are up against a large, well-funded defendant. Litigation funding can help level the playing field as well as provide many other advantages. In considering funding for a case, litigants should understand these basic principles:
- Funding can strengthen a case. Finances often limit the strategies that companies decide to pursue during litigation. Funding enables a litigant to obtain quality legal representation as well as employ the best tactics and hire the top experts, without cutting corners to save money. In addition, having a funder can result in better settlement offers when the other side knows the party has the resources to litigate.
- It enables litigants to bring meritorious claims. Many businesses decide not to pursue strong claims because of the costs and risks of bringing an action. Funding addresses those financial concerns and gives businesses the freedom to enforce their legal rights.
- Funders provide objective advice. Smaller businesses may not have in-house counsel to provide a second opinion on the merits of the case and advise on strategies. Funders do not exercise any control over a case, however, they have extensive experience evaluating cases and can provide an independent assessment about the merits of a case and the best strategy to employ. This can help litigants save time and money as well as provide tactical advantages.
- Companies can use funding as a risk management tool. Funding is a nonrecourse investment. Clients are only obligated to pay back the funding if they prevail. The funder is reimbursed solely from the proceeds of successful litigation.
- Funding can be used for a wide range of expenses. Financing can pay for lawyer fees, expert costs, appeals, capital, and other expenses. For small companies, it is particularly helpful in managing cash flow because the business does not have to be concerned with paying high monthly legal bills.
- It can support and protect business operations. It may be years before a litigant recovers monetary damages. In the meantime, the company needs to continue to operate, which may be even more challenging if the business is facing lost revenue as a result of the litigation. Aside from the cost of paying for the litigation, the action itself may damage the company’s reputation and business relationships. Funding can provide strategic and operating capital to help keep the business afloat.
- Financing is not appropriate for every case. It is available in many types of commercial cases. However, the minimum financing amount is typically $1M and the anticipated recovery of actual damages should be at least $10M. Other requirements also apply.
- Using a reputable and experienced funder is crucial. Litigation funders should have a well-established track record. They should provide transparency about their financial position and be able to prove their record of success with publicly available information.