Why do law firms seek out loans from litigation funders rather than opt for traditional financing ?

This is one of the most frequently asked questions from investors trying to understand the litigation funding sector. It is a valid question, as one might expect that more “traditional” financing options would be available. However, for several reasons, these options are usually not suitable for law firms, which is why they turn to specialized litigation funders for their financing needs.

Traditionally, when a company needs financing, it has several options. Notably, it can decide to sell equity or request a business loan or line of credit from a bank.

However, when it comes to law firms, the first option, deciding to sell equity, is not possible. External non-lawyer investors typically cannot buy into the share capital of a law firm due to legal restrictions. Many law firms aren’t even structured as corporate entities. For the most part they are organized as a simple partnership, between lawyers, who are joint owners and business directors of the firm.

As for the second option, securing a business loan or line of credit from a bank, it is very rarely feasible, and when it is, often unsuitable. The issue that banks face when it comes to law firms is how to underwrite the loan. Since the collateral provided by a law firm consists of the portfolio of claims handled by the firm, it is difficult to understand and evaluate its value. That is why litigation funders hire legal professionals who are experienced in analyzing the type of cases handled by the law firms they finance. Bank and other financial institutions generally lack such expertise. Consequently, they often offer smaller loans with additional guarantees, which may not meet the firm’s needs.

Moreover, traditional bank loans are typically inflexible and unable to address the specific financing needs of law firms, such as covering legal costs, expert fees, or attorney fees. Litigation funders, on the other hand, provide tailored solutions that better match these unique requirements.

Law firms therefore now quasi exclusively seek out funding from litigation funders, which has driven the significant growth of law firm lending over the past few years. Clearly,  this type of funding fills a crucial niche, offering solutions that traditional finance simply cannot match.

Interested in litigation funds? Do not hesitate to contact us at Blue Lakes Advisors

27.08.2024

Laureen Moret,
Litigation Finance Specialist, Lawyer, LL.M.
Galerie Jean-Malbuisson 15
1204 Geneva                     M  +41 79 659 15 95
Switzerland                       F   +41 22 552 09 26
laureen.moret@bluelakesadvisors.com
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