Finance Insights

New business finance option for SMEs

5 MIN READ

As with businesses of any size, there might be a certain moment in time when SMEs get into legal disputes with other businesses. If this happens, they are likely to be facing a larger player with much deeper pockets. The big business has the money to hire the best legal counsel to put themselves in the best position to win the case.

Many SMEs, on the other hand, do not have the money and/or risk appetite to commit to the legal proceedings when both the costs and timing to pursue the case is uncertain at the outset. Litigation funding – the financing of legal cases by third parties in return for a defined share of the proceeds – provides the financial resources to enable costly litigation or arbitration cases to proceed.

 

How does litigation funding benefit SMEs?

Litigation funding has been traditionally used by claimants lacking financial resources to pursue meritorious claims to trial. There are, however, many other benefits associated with the use of litigation funding.

Source of non-recourse funding
Litigation funding allows companies to pursue valuable claims without using their own capital. Thus, companies are able to dedicate their financial resources to support their operations and growth instead. Funding is typically non-recourse meaning that it only needs to be repaid if the case reaches settlement or wins at trial.

Shifting risk
The moment a claimant decides to pursue litigation they are taking on financial risk. This risk involves not only the irrecoverable costs of the litigation (such as ongoing legal fees) but also the risk of having to pay adverse costs – the other side’s costs if the litigation is unsuccessful. Litigation finance can shift that financial risk to a litigation funder, who has expertise in litigation and has a diversified portfolio of cases. As a result, a litigation funder is in a better position to bear these risks.

Independent review
A litigation funder has to complete a careful due diligence for the case by evaluating many different factors including but not limited to legal merits, quantum, case strategy, enforceability. If a funder decides to finance the case, then the claimant (as well as the defendant) can read this as a signal that an independent party also considers the merits of the case to be strong. In some cases, the fact that a funder has agreed to fund a claim may increase the chance of the claim being settled.

Even if a litigation funder decides not to provide funding, the claimant and his lawyers are likely to gain some valuable insights into the weaknesses of the case and some issues that they should seek to address.

Alignment of interests
Once the case is funded, the interests of the claimant and the litigation funder are aligned in that both parties share common interest in ensuring that the budgets are met and the appropriate legal team, case strategy, fee structure are in place. In addition, where a claimant needs to exercise its influence over case strategy and/or budget, a litigation funder can act as a valuable ally in raising these issues with the claimant’s legal team.

Project management
Experienced funders are able to assist the lawyers and claimant in managing the litigation including assisting in strategic and tactical decisions. They are able to bring a highly commercial and objective perspective to assessing a claim. This can provide real benefits to claimants and can help to shape how a claim is pursued. The funder’s role can assist in the efficient management of a claim by ensuring that the focus is kept on the real issues in dispute and by seeking to avoid time and costs being spent on the pursuit of claims that are weak or unnecessary.

 

Why use an online platform?

The litigation funding market has grown significantly, however, the market for smaller claims (requiring <£1m in funding) remains relatively underserved by large institutional investors.

This gap has prompted the development of alternative litigation financing solutions such as specialist online platforms that can raise money to fund smaller claims. This financing solution can be particularly appealing to SMEs for several reasons.

Simplified decision making
Online platforms tend to have a simplified decision making process that helps to avoid delays frequently experienced with more traditional options in the market. As a result, they can assess cases and arrange funding faster than its peers.

Competitive pricing
In addition to faster decision-making, platforms that offer litigation funding use another innovative approach to offer a lower cost of capital. In contrast to large institutional players, a litigation funding platform relies on the crowd to fund cases. This operating model minimises cash-drag and enables platforms to offer more competitive pricing.

By your side, every step of the way
In addition to providing funding, online platforms are able to provide some legal guidance or make an introduction to experts that might offer initial consultation to potential claimants. First-time claimants often find that protecting their legal rights can be daunting and, in addition, they have limited understanding of the litigation process. Thus, claimants can receive some guidance, strategic support and advice to help them achieve the highest value outcomes.

No one-size-fits all
Online platforms tend to have a more flexible approach to funding. Funding packages can be tailored to the specific needs of the business and the nature of the dispute. They are able to raise funds to cover some or all of the legal costs of pursuing a claim, including counsel, expert and court fees. The company can provide finance to be used as an additional working capital for the business or reimburse previously incurred costs.

 

How we help

Check if you are eligible for Litigation Funding here

Whether you’re looking to grow your business, make investments or support your cash flow, we are here to help.

As a business, you can use the service for free and save time with one simple online application, and let our experts handle the rest.

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