Kamis, 18 April 2013

Lawsuit funding-price developments

Much is spoken/written about the “cost” of getting a cash advance against future proceeds from a lawsuit pending. Otherwise known as loan-financing lawsuit or settlement, many companies offer money now against future resolution of a case. The costs associated with these operations vary widely. This post looks a wide debate on the history of prices in industry financing lawsuit.

The lawsuit industry financing was created to solve the liquidity problems of those individuals who were experiencing financial hardship waiting for their case to be solved. Because many jurisdictions were simply stuck with thousands of cases, plaintiffs often had to wait months if not years for their cases to be settled. Lawsuit funding company offered immediate cash customers against future proceeds from the case. The catch was that the “costs” associated with these operations were very expensive, at least when comparing the costs with other sources of funds.

What is “expensive”?

Historically, lawsuit funding was considered a “last resort” source of money for those in financial need. I write “historically” because this business is relatively new and only in mid-2000 to date have large amounts of venture capital have deployed to invest credits pending lawsuit. When the business started, towards the end of the 20th century, lawsuit loan companies offered high rates like 10% per month! Now that is expensive. Clearly, in most cases, people who have gotten funding at those prices were in desperate need of funds.

But it was not greed of investor who sets the prices. In any new activity, mistakes are made but correct and business evolves through competition, as others clearly see the potential for a return on their investments. Because of this history, most investors recognize the potential for a return on capital. The competition then takes hold of this potential profitability as investors analyze what is a reasonable rate of return to put their money at risk. In most cases, this competition “cut the fat” out of the return and results in better prices for the applicant.

We have seen this first hand in this business. And this means that the cause of corporate financing is becoming 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 funding cash advance. This is a far cry from the original rates. Competition and improved corporate efficiency has made this cost reduction a reality. The trend is likely to continue. That will undoubtedly cause more funding “reasonable” than ever.

Moreover, investors also benefit. Past mistakes are corrected and refined business model, investors are able to assess more accurately the risks for their capital. Understanding of risk is paramount for investors and seek capital preservation and return on capital. As our business evolves, more investors “conservatives” are likely to put their capital in these investments.

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