Litigation funding: reducing costs, maximising profit

With the growth of the legal finance industry, many working with the legal sector have come to understand the advantages that litigation funding has to offer.

Obtaining legal funding from financial professionals can improve the quality of the legal advice and expertise available to a claimant, provide access to justice and, above all, shift the financial risks of litigation to the funder.

Andrew Jones, Managing Director at Vannin Capital and Tim Allen, Partner at PwC explain that Whilst much has been said about these benefits, there are plenty of other advantages afforded by litigation funding that are arguably just as significant and that are particularly relevant for CFOs and FDs.

Litigation funding can result in improvements in cash flow and EBITDA, bring predictability to forecasts of legal spend and can even help transform a business’ legal team from a cost centre to a profit centre. Perhaps the most important financial benefit is that litigation funding can allow a business to pursue a claim at no cost and at no financial risk.

Boosting company finances

CFOs and FDs are typically reluctant to fund claims and there are good reasons for this – self-funded claims are generally expensive, lengthy and uncertain in outcome. As a result, a firm that brings a claim without a third-party funder can see costs spin out of control, draining resources and depressing operating earnings. This, in turn, can negatively affect company accounting and financial reporting metrics, and even the value of a company.

By bringing predictability to cash flows, litigation finance solutions eradicate the downside risks of pursuing a meritorious claim. Profitability can also be improved, as valuable resources that would have been used to finance the claim are retained and can be deployed elsewhere on key business activities that generate revenue and profit.

Further, there are also advantages in terms of financial reporting. The costs of financing a legal claim are recorded within EBITDA, whereas the rewards of a successful claim are recorded below the line as an exceptional item. However, with the use of litigation finance to fund a claim, the running costs are eliminated, boosting EBITDA and potentially leading to a higher market value for the business.

Making legal departments profitable

The legal team has a vital role in a business – to advise on contracts, facilitate regulatory compliance, defend the organisation when facing a lawsuit and, if need be, to bring claims.

Despite the key role the legal team plays within an organisation, it rarely generates revenue or contributes to the bottom line. On the contrary, the legal department is generally viewed as a necessary cost of doing business – a perception that litigation funding can change.

By being able to pursue meritorious claims without the concern of budgetary constraints, a company can generate new revenue streams and turn its legal department from a cost-centre to a profit-centre. With claims that were previously inaccessible due to budgetary restrictions being made possible at no further cost or risk, litigation funding unlocks the profit-making potential of a legal department.

Exploring the world of litigation funding

Lawyers – whether they be GCs, Heads of Litigation or working in solicitors’ firms – are increasingly looking to litigation funding as the solution to dealing with costly and risky claims. Given the wider benefits of third-party funding in respect of profitability and financial reporting, it seems only a matter of time until CFOs and FDs also come to think of litigation funding as a powerful financial and risk management tool within business operations.