Lawsuit financing: the evolution of prices

admin 0

Much is said / written about the “costs” associated with obtaining a cash advance against future proceeds from a pending lawsuit. Also known as a lawsuit loan or pre-settlement financing, many companies offer cash now against future resolution of a case. The costs associated with these transactions vary widely. This publication attempts an extensive discussion of the history of pricing in the lawsuit financing industry.

The lawsuit financing industry was born to address the liquidity concerns of those who were facing financial difficulties while waiting for their lawsuit to be resolved. Because many jurisdictions were simply bogged down with thousands of cases, plaintiffs often had to wait months, if not years, for their cases to be resolved. Lawsuit financing companies offered clients immediate cash against future benefits of the case. The problem was that the “costs” associated with these transactions were very expensive, at least when the costs are compared with other sources of funds.

So what is “expensive”?

Historically, lawsuit funding has been viewed as a “last resort” source of money for those in financial need. I write “historically” because this business is relatively new and only in the mid-2000s to the present have larger amounts of venture capital been invested to invest in pending lawsuits. When the business started in the late 20th century, lawsuit loan companies offered rates of up to 10% per month. That’s expensive. Clearly, in most cases, the people who raised funds at those rates were in desperate need of funds.

But it wasn’t the investor’s greed that set the price. In any new business, mistakes are made but corrected and the business evolves through competition while others clearly see the potential for return on their investment. Because of this history, more and more investors are recognizing the potential for return on equity. Competition then seizes on this potential return as investors explore what is an acceptable rate of return to put their money at risk. In most cases, this competition “cuts the fat” on the return and results in a better price for the applicant.

We have witnessed this first hand in this business. And what this means is that the lawsuit financing business is becoming more and more efficient.

The 10% interest days per month are decreasing rapidly. Currently, an applicant can expect to pay between 1.5% and 4.5% per month to finance demand cash advances. This is a long way from the original rates. Competition and increased business efficiency have made this cost reduction a reality. The trend is likely to continue. Which will undoubtedly make the financing of the lawsuits more “reasonable” than ever.

In addition, investors also benefit. As past mistakes are corrected and business models refined, investors can more accurately assess the risks to their capital. Understanding risk is of primary importance to investors and they seek capital preservation first and return on equity second. As the business evolves, increasingly “conservative” investors are likely to put their capital into these investments.

Thank you for your interest in the lawsuit financing business.

pmc

Leave a Reply

Your email address will not be published. Required fields are marked *