- December 12, 2021
- Posted by: Robert Brown
- Category: Investing
Much is spoken/written about the “costs” associated with obtaining a cash advance against the future proceeds of a pending lawsuit. Otherwise known as a lawsuit loan or pre-settlement funding, many companies offer cash now against the future resolution of a case. The costs associated with these transactions vary greatly. This post attempts a broad discussion of the history of pricing in the lawsuit funding industry.
The lawsuit funding industry was born to address the liquidity concerns of those individuals who were encountering 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 settled. Lawsuit funding companies offered clients immediate cash against the future proceeds of the case. The catch was that the “costs” associated with these transactions were very expensive, at least when comparing costs with other sources of funds.
So what is “expensive?”
Historically, lawsuit funding has been deemed 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 2000’s to the present have larger amounts of risk capital been deployed investing in pending lawsuit claims. When the business first started, near the end of the 20th century, lawsuit loan companies offered rates as high as 10% per month! Now that’s expensive. Clearly, in the majority of instances, persons who obtained funding at those rates were in desperate need of funds.
But it was not the investor’s greed that set the pricing. In any new business, mistakes are made but corrected and the business evolves through competition as others clearly see the potential of a return on their investment. Because of this history, more and more investors recognize the potential for a return on capital. Competition then takes hold of this potential profitability as investors analyze what is an acceptable rate of return for putting their money at risk. In most instances, this competition “trims the fat” off of the return and results in better pricing for the applicant.
We have witnessed this first hand in this business. And what this means is that the lawsuit funding business is becoming more and more efficient.
The days of 10% per month interest are dwindling fast. Currently, an applicant can expect to pay anywhere from 1.5% to 4.5% per month for lawsuit cash advance funding. This is a far cry from the original rates. Competition and better business efficiency has made this reduction in costs a reality. The trend is likely to continue. Which will undoubtedly make lawsuit funding more “reasonable” than ever.
Moreover, investors also benefit. As past mistakes are corrected and business models refined, investors are able to more accurately assess the risks to their capital. The understanding of risk is of primary importance to investors and they seek the preservation of capital first, and the return on capital second. As the business evolves, more and more “conservative” investors are likely to place their capital in these investments.
Thank you for your interest in the lawsuit funding business.