On December 19, 2018, the Federal Reserve moved its benchmark interest rate to 2.5%. This quarter-point raise marks the ninth interest rate hike since December 2015, and the Federal Reserve projects another two rate increases next year.
Interest rate news is frequently tied to predictions about how it will affect consumers—particularly in terms of increased benefits for things like savings accounts and certificates of deposits, and increased costs for credit cards, mortgages, and car loans—but businesses (large and small) will face the fallout, too. Barron’s recently reported in an article entitled “Rising Interest Rates Complicate the Corporate Borrowing Spree” that many companies have loaded up on debt while interest rates were low and that “higher debt burdens could mean trouble in the face of a slowdown, and at the very least, would certainly leave less room for missteps.” And back in June 2018, following a previous interest rate bump, one Forbes contributor encouraged small businesses—which typically borrow money at floating interest rates—to borrow sooner rather than later, as the cost of capital to fuel growth is going up.
The end of cheap money through traditional debt financing means that companies are facing more difficult choices. Is a new equipment purchase, while necessary for growth, worth it in light of increased borrowing costs? In past eras, the decision to pursue otherwise worthy litigation claims would succumb to the same hard calculus. Fortunately, modern litigation finance offers an alternative to the rising costs of traditional loans, and can allow cash-strapped businesses to simultaneously pursue growth strategies and valuable litigation claims.
Litigation finance offers two distinct benefits during a time of increasing interest rates. First, the advantages conferred by a non-recourse investment become more pronounced as traditional borrowing costs go up. Because litigation finance is non-recourse, companies that receive such funding, but are not victorious in their litigation, will not be stuck with debt (including now higher, compounding interest charges) that must be paid back at the end of a case regardless of the outcome. In contrast to a bank loan, litigation funding need not be repaid if the case is unsuccessful. And, while traditional debt financing is typically reflective of the Federal Reserve’s benchmark rates, modern litigation finance terms are dictated by the strength of the case, and are untied to interest rate fluctuations. Accordingly, while the returns for non-recourse litigation funding are typically greater than a traditional recourse loan, rising interest rates have begun to close that gap.
Second, as companies are forced to become more selective about how to obtain and deploy capital, litigation funders can play an increasingly valuable role in helping to unlock value in the form of: a) identifying meritorious litigation claims that can increase company cash flow, and b) allowing companies to treat funded cases as financed assets, rather than corporate expenses. Established litigation funders like Bentham IMF are staffed with experienced trial lawyers who are trained to evaluate cases against a myriad of factors. We can act as a valuable resource for in-house counsel to consult before deciding whether to pursue a plaintiff-side claim and if desired, even assist in the selection of proper counsel for that particular type of claim. In short, litigation funding can transfer a corporate legal department from a loss center that is especially neglected (or worse) during a capital crunch into a profit center that can improve balance sheets and free up (or even produce) capital that can be used elsewhere for growth.
Companies of all sizes have any number of established strategies to respond to rising interest rates. Litigation finance offers a new alternative to add to the playbook.
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