Cost Comparison for Financing Litigation

Litigation finance is used by corporations and law firms to pursue litigation, to move cost and risk off balance sheets, and to leverage the captive value of pending litigation to unlock working capital for the business. The use of litigation finance by law firms quadrupled from 2013 to 2016, but most lawyers and their clients have never used it, possibly because they haven’t compared the cost of paying for legal fees and expenses out-of-pocket versus financing those matters with a third party.

A pending litigation claim is, practically speaking, a “receivable,” albeit a contingent one. From an accounting perspective, when a company is owed money by someone, it almost always creates a balance sheet asset — a receivable. Money spent to collect that receivable is often added to its asset value, or “capitalized.” Litigation does not follow these accounting rules. As a company pursues litigation, the money it spends is immediately expensed, flowing through the P&L and reducing operating profits. Moreover, those expenses do not create a balance sheet asset.

There are many ways clients and their firms can use litigation finance, for example, to de-risk judgments on appeal or to unlock working capital for the business by monetizing pending individual high-value claims or portfolios of plaintiff and defense matters. Once clients appreciate that external financing addresses several of the pain points associated with litigation, the decision to use legal finance becomes attractive.