Litigation Financing: Considerations for Small Companies Deciding Whether to File a Complaint

Litigation financing enables individuals and businesses to pursue legal action despite financial constraints. This provides them with the funds needed to challenge bigger opponents.

Investors back these cases in return for a portion of future judgments or settlements. This method promotes fairness and accountability while addressing barriers to legal representation.

While gaining popularity, understanding the benefits and drawbacks of litigation financing ensures its continued value.

What is Litigation Financing?

Litigation financing is also known as legal funding or lawsuit loans. It’s a mechanism that allows plaintiffs to secure the necessary funds to pursue a legal case.

Litigation funding involves a third-party funder, a specialized company. They provide financial help to cover the associated litigation costs.

In return, the funder receives a part of the settlement or judgment if the case is successful.

How Does Litigation Financing Work?

For plaintiffs who may not have the means to defend themselves, legal financing is ideal.

When a provider applies for this type of funding, they test the case’s strength and chances of success. If approved, the funder pays for expenditures, including court costs and attorney fees.

As such, the plaintiff continues the lawsuit without making any early financial obligations. The lawsuit funder gets their money back plus an agreed-upon profit when a winning decision is made.

Key Aspects of Litigation Funding

Here are some aspects of this funding:

  • Third-party funding. In litigation financing, a third-party funds plaintiffs or law firms to cover legal expenses and costs. This allows individuals who may not have enough resources to pursue claims.
  • Non-recourse loans. The financing provided by litigation financiers is structured as non-recourse loans. If the case is unsuccessful, the borrower does not owe anything back to the lender. If the case wins, the lender receives a predetermined recovery percentage.
  • Alignment of interests. Because the litigation financier only gets paid if the case succeeds, their interests are aligned with those of the plaintiff or law firm. Both parties want to see the case resolved so they can receive a positive outcome.
  • Transparency and disclosure. Legal funding agreements may need to be disclosed to defendants, judges, or both.

Common Misconceptions About Litigation Financing

Despite its increasing popularity, litigation financing is often misunderstood.

Here are some common misconceptions:

Misconception 1: It’s only for plaintiffs.

In reality, both plaintiffs and defendants can seek litigation financing. Defendants may use it to manage the costs of their defense.

Misconception 2: It encourages frivolous lawsuits.

Concerns exist that it could incentivize lawsuits by offering financial backing to claimants with weak cases. Besides, reputable providers conduct thorough assessments of claims to mitigate this risk.

Misconception 3: It’s the same as a traditional loan.

Litigation financing is not a traditional loan.

Unlike a loan, the funding is non-recourse, meaning the litigant only repays if the case is successful. If the case is unsuccessful, the litigant typically owes nothing to the litigation funder.

Misconception 4: It increases legal costs.

Some believe that commercial litigation financing increases legal costs. But, proponents argue that it can help level the playing field. This allows individuals to pursue a legal claim against more powerful opponents.

Misconception 5: All litigation funders are the same.

There is a misconception that all litigation finance providers operate similarly. In reality, different companies may have varying terms, conditions, and ethical standards. Litigants must check and choose reputable and transparent funders.

How to Find a Reputable Litigation Financing Company

Working with a reputable and trustworthy company is crucial. To find litigation funding firms, plaintiffs should conduct thorough research.

Here are some tips to take:

  • Start your investigation by looking at several lawsuit finance firms.
  • Seek out reputable companies who have a track record of sales.
  • Look through internet reviews, testimonies, and ratings.
  • Make sure the litigation finance provider is open and honest about all the details.
  • Be mindful of businesses that have confusing contracts.
  • Verify that the agreement has an explanation of all costs, interest rates, and payback conditions.
  • Companies with integrity disclose their pricing policies in a transparent manner.
  • Businesses with a history of providing lawsuit finance should be preferred.
  • Seek out litigious financiers who have a staff of attorneys.
  • Verify if the firm providing lawsuit finance abides by moral guidelines.
  • Verify whether the lawsuit funding provider abides by the laws and rules in your area.
  • Compliance with legal and ethical standards indicates a reputable and responsible provider.
  • Assess the company’s communication practices.

Before finalizing any agreement, consult with your legal counsel. Ensure that your attorney is comfortable with the terms and conditions of the funding arrangement.

Wrap-Up

Litigation financing is a resource for businesses seeking justice but lacking the finances. But, plaintiffs must test the potential benefits and risks.

With careful consideration, third-party litigation funding can let plaintiffs fight for their rights.

About BELAY Financial:

BELAY Financial LLC (www.belayfinancial.com) provides flexible contract CFO & Controller services to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, valuing businesses, and other financial management. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. BELAY Financial has a team of more than 45 professionals serving more than 120 companies, and is part of BELAY Solutions, a national firm providing virtual assistants, social media management, and accounting services to small companies.