Even though the COVID-19 pandemic and the now rising inflation are throwing businesses into chaos, the litigation finance industry’s growth continues to happen.
Despite early predictions that the COVID-19 epidemic would severely upset the legal sector in the near future, litigation funding has continued to expand and change, according to finance and legal experts. They looked at the growth trends and predicted that they would continue to grow in the years to come.
Many law firms’ financial prospects were gloomy, which started nearly two years ago when the epidemic initially uprooted the legal business. As offices vacated, fears of layoffs, salary cutbacks, and bankruptcy abounded.
However, this robust legal market has almost completely flipped the narrative today. With the financial help of litigation finance, law firms’ revenues keep growing.
Here, we’ll discuss the shift of litigation funding during and after the pandemic.
Litigation funding, and the pandemic
During difficult economic times, a large number of lawsuits tends to rise automatically. Bankruptcy filings, fraud, and contract breaches increased as a result of a failing economy. This leads to a greater need for litigation to collect money due, as, while legitimate disagreements happen, debtors are more likely to fight payment with fictitious claims under the present atmosphere.
Similarly, litigation expenses are rising, and taking litigation to trial may be costly. In most situations, the losing party will be responsible for both their opponent’s and their expenditures. As a result, many firms may choose to postpone pursuing genuine claims to save money and risk.
Businesses in all industries face cashflow constraints due to the pandemic’s extensive effects. The 2021 economic policy changes which are ultimately leading to inflation, also play a big part in these negative effects. And to keep industries afloat, most need money.
Despite the potential reward of successful litigation, using litigation to protect one’s commercial assets may be deemed an unnecessary risk under a low economy because it can drain capital.
It can be difficult to persuade well-capitalized individuals without building any tangible assets when the possibility of recovery is a huge possibility.
Lawyers around the country agree on one thing, their firms have and are avoiding pursuing valid claims for fear of negatively hurting the bottom line. While this may help with cash flow in the near term, the long-term consequences of merely writing off a loss can be far more detrimental.
However, a variety of solutions exist that allow firms to deduct legal expenses from their balance sheets and free up cash while avoiding a loss imposed by a third party. The practical options outlined here can help law firms handle the financial demands of litigation without jeopardizing their rights.
Although many litigators are knowledgeable and updated with litigation finance, acceptance of the industry is still low, and this could be hurtful in the current more difficult economic times.
Demand for legal financing
COVID-19 sparked a massive economic collapse, with 22 million unemployment claims filed in the United States in the four weeks following the enactment of extensive limitations. The states that stayed closed for a more extended period suffered the most.
Small firms were particularly exposed to the pandemic response’s cash flow problems in shut-down states. They were harmed by their worry of being compelled to close forever. Furthermore, small firms found Chapter 11 bankruptcy protection and reorganization to be prohibitively expensive, time-consuming, and hazardous.
Clients made cost-conscious purchasing decisions or struggled to keep current on their hourly fees, putting law firms under financial strain even under normal conditions.
Law firms are being pinned between the necessity to manage accounts receivable and the need to stay compassionate toward troubled customers by looming requests for reductions and the reorganization of alternative pricing agreements.
The dramatic drop in attorney travel and in-person court appearances, which have now been substituted with erratic remote work arrangements, made earlier hourly billing rates more difficult to justify. The ever-present requirement to handle operational expenditures while cases await settlement exists for contingency attorneys with limited or no recourse to traditional funding.
Litigation funding considerably helps during this period
More small company plaintiffs and legal firms have recently sought litigation finance to overcome such financial gaps. When the pandemic’s impacts were initially recognized in the United States, legal finance businesses experienced a surge in incoming funding queries that lasted weeks.
Many of these petitions originate from plaintiffs who are anticipating rising accounts receivable and worsening economic conditions and need to address short-term working cash demands, such as company operation expenditures, attorney fees, expert witness fees, and court costs.
Portfolio finance and direct funding agreements can also give law firms more liquidity and flexibility, maintaining short-term financial stability and potentially expanding the scope of contingency cases a firm can handle.
Plaintiffs’ claims are now more prevalent, but some funders may also support defendants as a way for them to limit the risk of a huge judgment or as part of a portfolio investment.
Litigation finance is also becoming more popular among law firms. According to recent press reports, many high-profile major law firms, which have traditionally focused on defense work, are considering self-funding plaintiff’s side contingency work as an income source. Other major and medium-sized law firms have begun to look at legal finance.
Litigation finance can assist companies that rely on hourly legal fees from clients to keep their company healthy and prosperous.
Firms are investigating the potential business opportunity of working with lawsuit funders to both guarantee fees and help clients save money. As financial demands on firms and clients grow, law firms are looking into the possible business opportunity of working with litigation financiers for their benefit and that of their clients.
The bottom line
The pandemic has drastically altered millions of business and legal professionals, who are now looking for new sources of cash and stability. And the current rise in inflation does not help them.
The counter-cyclical nature of litigation is well known, and the oncoming flood of legal claims threatens to make equal access to justice a top priority for plaintiffs.
Commercial litigation finance can help attorneys and clients acquire financial clarity and flexibility in the face of tremendous uncertainty in the proper circumstances.
Law firms, companies, and enterprises that survive this current crisis may prepare themselves to emerge stronger when it ends, just as some did following the economic disaster in 2008, by transforming illiquid legal claims into non-recourse capital that may be employed in the coming months.
Baker Street Funding is a leader in the litigation finance space. Contact one of our team members today to assist you or apply for litigation funding today.