Why Law Firms Choose Litigation Finance Over Loans
Litigation financing can provide distinct advantages for law firms looking to grow their practice without taking on the risk and expense of a loan from a bank.
The key difference between litigation financing and loans is that litigation financing is typically non-recourse, meaning that a funder only collects a return on its investment in the event of a successful judgment or settlement. A loan requires repayment of the principal and interest, regardless of the outcome.
Loans have been a traditional tool for law firm growth, with firms often turning to traditional financial institutions for capital to expand operations and take on additional cases.
Relying on a loan from a bank can entail substantial risk should anything go wrong. While firms may have the best intentions when taking loans, any number of unexpected events, such as losing a highly profitable practice group, could challenge their financial performance and impede their ability to satisfy the loan commitment. An unpaid debt can follow a firm for years and develop into a public relations nightmare that may perpetuate further financial challenges for a firm. These dangers are important factors for firms to consider as they assess financing options.
Litigation finance serves as an alternative worthy of consideration for firms that prefer to borrow capital with fewer long-term risks. Litigation funders deploy their capital as a non-recourse investment, not as debt. They generally invest in law firms that have a portfolio of cases with a high likelihood of success to use as collateral for the investment. The firm commits to repaying the funder its principal plus a return only if the cases in the portfolio are successful. If the firm loses all of the cases, it owes the funder nothing. This affords firms the security of knowing their capital reserves will not get tapped to repay the funder. The same may not be true in the case of a loan from a bank.
This arrangement also releases a firm’s capital for other expenses, including hiring lawyers, adding new practice groups, or making additional investments in contingency matters. A funded litigation portfolio can also allow a law firm to take managed risks in diversifying its litigation investments by offering more alternative fee arrangements, resulting in payment flexibility for clients. By using a portfolio with rigorously selected cases, the firm guarantees that a portion of revenue is received immediately with a chance to see significantly more income if the cases perform well.
For more information about how a litigation finance portfolio could benefit your firm, please contact us.