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 the future resolution of a case. The costs associated with these transactions vary widely. This post attempts a broad discussion of the history of pricing in the claims financing industry.

The claims financing industry was born to address the liquidity concerns of those who were facing financial difficulties while waiting for their claim to be settled. Because many jurisdictions were simply stuck with thousands of cases, plaintiffs often had to wait months, if not years, for their cases to be resolved. Claims financing companies offered clients immediate cash against future proceeds from the case. The problem was that the “costs” associated with these transactions were very high, at least when comparing the costs with other sources of funds.

So what is “expensive”?

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

But it wasn’t investor greed that set the price. In any new business, mistakes are made but corrected and the business evolves through the competition as others clearly see the potential return on their investment. Because of this history, more and more investors recognize the return potential of capital. This potential return is then seized by the competition as investors consider what is an acceptable rate of return to put their money at risk. In most cases, this competition “trims the fat” off the return and results in better prices for the applicant.

We have witnessed this firsthand in this business. And what this means is that the claims financing business is getting more and more efficient.

The days of 10% monthly interest are rapidly diminishing. Currently, an applicant can expect to pay between 1.5% and 4.5% per month for lawsuit cash advance financing. This is a far cry from the original rates. Competition and increased business efficiency have made this cost reduction a reality. The trend is likely to continue. Which will no doubt make lawsuit funding more “reasonable” than ever.

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

Thank you for your interest in the lawsuit financing business.

pmc

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