Litigation funding may provide an effective alternative to selling receivables for law firms looking to quickly improve cash flow, enhance profitability, and preserve future revenue.
At year’s end, many law firms search for capital to pay down expenses or spruce up the bottom line. Occasionally, for example, they sell their accounts receivable to financing companies as a way to quickly generate income. Factoring, as the practice is known, allows firms to take a lower percentage of potential proceeds from clients in return for guaranteed income. The financing company then collects on the full bill when it comes due.
Bentham IMF offers another path. It invests in portfolios of three or more commercial cases that are strong in terms of the merits, damages, and collectability. Its minimum portfolio investment is $2 million, and can be as much as $25 million or more.
Litigation funding can help the balance sheet in several ways. Like factoring, Bentham’s investment provides immediate capital to the firm that can be used to pay for operations, existing litigation-related expenses, or to take on new litigation.
It also allows the firm to benefit from potential future revenue. If, for instance, a portfolio yields recoveries beyond the funder’s expected rate of return, the law firm collects the proceeds. “With litigation funding, you can pay off debt and expenses without selling off your assets and losing a potential stream of revenue,” says Allison Chock, a Bentham Investment Manager and Legal Counsel.
In terms of balance sheet treatment, litigation revenue typically cannot be recognized as an asset until an actual recovery occurs. Litigation costs, on the other hand, go straight to the bottom line. Thus, a firm’s balance sheet may show all the expenses and none of the potential upside. Funding solves the problem by turning litigation into a recognizable asset.
“You get to share the risk of litigation with the funder, and a net negative on the balance sheet becomes a positive because the asset—the contingent fee—is no longer invisible,” Chock says.
Chock also notes that litigation funding fully values the firm’s potential return on a case. On the other hand, when a firm sells its prime receivables at a discount, its realization rate may suffer because it is not achieving a full return on its most lucrative billings. “With funding, the historical rate is preserved,” Chock says. “You are not taking a haircut on the value of the case.”
To learn about the benefits of litigation funding, contact us for a consultation.