By Louisa Klouda, CEO at Legal Futures Associate Fenchurch Legal
Managing financial risk in litigation
Financial risk is a major challenge for law firms managing a high volume of claims. Litigation is an expensive and lengthy process, with traditional bank funding often unavailable. As a result, law firms may struggle to pursue strong cases due to cash flow constraints, particularly when covering upfront costs such as disbursements, expert reports, and insurance premiums while awaiting settlements.
While the cost of a single case may seem manageable, firms handling hundreds or even thousands of cases at once can face significant financial pressure. With cases often taking 12-24 months to settle, law firms have their own capital tied up for long periods, limiting a firm’s ability to take on new cases or grow its business.
Managing financial risk is therefore crucial for long-term sustainability, especially for firms handling a high volume of consumer claims. Litigation finance offers an alternative funding solution that helps firms mitigate financial exposure while maintaining operational stability.
What is litigation finance
Law firms have several financing options, including overdrafts, secured loans, invoice factoring, equity investment, and partner funding. However, these traditional methods often fail to align with the unpredictable nature of litigation.
Litigation finance is a specialised financial solution designed for the legal industry that aligns with case lifecycles. It provides law firms with access to capital to support a high volume of cases, funding upfront costs such as disbursements, which are covered by After-the-Event (ATE) insurance.
Unlike traditional business loans, litigation finance is tailored to meet the unique needs of law firms. It enables firms to take on more meritorious claims, manage cash flow effectively and reduce exposure to financial risk, while preserving their own working capital.
How litigation finance helps law firms manage financial risk
Litigation is inherently unpredictable. Case delays, prolonged court proceedings, and uncertain settlements can create financial uncertainty for law firms. The financial risk arises from the need to fund litigation upfront, across multiple cases, while waiting months or even years for resolution. This creates cash flow strain and unpredictability, making financial planning difficult. Litigation finance addresses these challenges by:
- Providing predictable cash flow: Firms no longer have to self-fund disbursements, freeing up capital for business operations and growth.
- Reduces financial exposure: Reduces reliance on partner capital or short-term borrowing by shifting the burden to an external funder.
- Enhancing budgeting & forecasting: Structured funding arrangements provide stability, ensuring firms can take on new cases without financial disruption.
- Mitigating liquidity risks: Protects law firms from liquidity risks associated with prolonged case durations.
- De-risking “no win no fee” cases: Ensures firms are not solely reliant on case outcomes to maintain cash flow.
- Protecting against case delays: Funding ensures firms can sustain operations even when case timelines are extended unexpectedly.
By using litigation finance as a strategic tool, law firms can improve long-term sustainability, reduce financial risk exposure and create a more resilient business model.
Litigation finance: A strategic tool
Litigation finance is more than just funding – it’s a strategic tool for managing financial risk. By leveraging external capital, law firms can preserve liquidity, reduce reliance on internal funding, and confidently expand their caseload without financial strain.
Providers like Fenchurch Legal offer simple, flexible and fast funding solutions.
To find out more about tailored litigation finance go to www.fenchurch-legal.co.uk
