Commercial litigation finance has grown from a niche concept into a mainstream financial tool for businesses and law firms. Whether you’re an attorney exploring ways to support your clients, or a party in a lawsuit seeking financial support, understanding the market process is critical.

What Is Commercial Litigation Finance?

At its core, commercial litigation finance is an arrangement where a third-party funder provides capital to a party involved in litigation, in exchange for a portion of any financial recovery. Unlike a traditional loan, repayment is typically non-recourse, meaning the funder only gets paid if the case is successful.

Commercial litigation finance helps to level the playing field by allowing parties with strong legal claims but limited resources to pursue justice. This is particularly meaningful when facing well-funded opponents, as it allows these claims to move forward rather than being sidelined due to financial constraints.

There are, broadly, three sources of litigation finance:

• Dedicated funders: investment funds focused on the litigation space.
• Multi-strategy funders: hedge funds or private equity funds with a strategy for investing in litigation.
• Ad hoc funders: family offices, individuals, or firms with a strategic reason for wanting to see litigation proceed.

Commercial litigation finance is also an important tool for law firms, assisting them with minimizing risk and bringing in more cases on contingency. As much as 82% of lawyers at law firms reported using litigation finance in 2024, an exponential increase from just 9% in 2012.

David Lorry of The Brattle Group points to various macroeconomic drivers behind the growth of this product, from increasing litigation costs, extended case timelines, and the burden placed on litigants as a result.

Common Risks and Challenges

Litigation finance offers significant benefits, such as improved cash flow, reduced litigation risk, and expanded access to justice. However, it also presents challenges that require strategic planning, including:

• Outcome Risk: If the case is lost, the funder may receive nothing.
• Funded Party Insolvency: Even a win can be hollow if the defendant is judgment-proof.
• Regulatory Uncertainty: Rules governing litigation finance differ widely by jurisdiction and are evolving. Some states are considering legislation requiring disclosure of funding arrangements.

Understanding Funder Niches and Case Fit

Not every case is a match for every funder. It can be challenging to find a funder, as the risk to them is so great that their underwriting process often takes time.

Funders all have niches, framed around various types of cases, the size of the case, the jurisdiction, and the stage of litigation. Finding the right funder thus requires speaking to an accomplished litigation finance attorney, consultant, or broker, who can prevent you from wasting time contacting those who would immediately dismiss your case.

Funders who are interested will also want to have a conversation prior to signing an NDA, discussing the state of the litigation and public information.

“One thing I do admonish my partners or other players seeking funding is that this is not an advocacy piece and they’re not a judge. You need to be realistic. You need to discuss the strengths and weaknesses of your case,” advises Paul B. Haskel of Crowell & Moring. “You need to have a realistic conversation, to the extent that the funder wants to continue.”

Funders see hundreds of opportunities but commit capital to only a fraction of cases. Jeffery Lula of GLS Capital outlines the three key factors that funders consider in choosing which cases to fund: “Funders want to invest in cases that have strong merits, provable damages, and collectible defendants. We need to see a path from investment to a recovery for the litigant.”

The Funding Agreement

Most funders will draft a prepaid forward purchase agreement, which contains clauses that can significantly affect the economics and control of a case. Understanding the following terms is essential:

• Payment Provisions: Details when and how the funder is repaid, and whether payments are fixed or tied to recovery percentage.
• Use of Proceeds: Specifies exactly how capital can be spent (e.g., expert fees, discovery costs, trial expenses).
• Conditions Precedent: Lists events or actions that must occur before funding is disbursed (e.g., filing of complaint, court acceptance of jurisdiction).
• Termination Clauses: Defines the grounds for early exit, such as material breach or fraud.
• Confidentiality and Privilege: Protects sensitive communications and work product from disclosure.
• Dispute Resolution: Establishes how conflicts between funder and client will be handled, e.g., in arbitration, mediation, or court.

Be Candid About Weaknesses

Matthew Blumenstein of Statera Capital stresses the importance for litigators to communicate openly: “Don’t bury your head in the sand. Find the bad facts, find the toughest issues, front them, and then wrestle them to the ground.”

In litigation finance, hiding weaknesses rarely works. Funders conduct deep due diligence, so if there’s a problem in the case, they will find it. Being upfront preserves credibility, speeds up the process, and can create strategic opportunities. Funders often employ skilled trial lawyers who may help craft solutions or reframe weaknesses as strengths.

Structuring the Funding

Funding doesn’t always arrive as a lump sum. Staging disbursements is common, both to match case needs and to mitigate risk.

Jeremy Waitzman, of Much Shelist, P.C., notes, “Often times the payments are further limited by stages or milestones. So it would be typical that a certain amount — for example $500,000 of the total commitment amount — to be used in the pre-filing stage and then another portion of the commitment amount to be reserved for the time period between the survival of a motion to dismiss and summary judgment with additional limitations all the way through final judgment and potentially appeal.”

From the funder’s perspective, staged payments ensure capital is deployed only if the case progresses as expected. From the claimant’s side, this approach requires careful budgeting to make sure critical litigation phases are fully funded.

The Bottom Line

Commercial litigation finance can be transformative, but only when approached with a clear understanding of the legal framework, the market process, and the potential pitfalls.

Effective funding requires careful due diligence, precise contractual terms, and alignment of interests. By combining rigorous case assessment, targeted funder outreach, and crystal-clear contracts, attorneys and claimants can leverage litigation finance to their advantage, all while avoiding the traps that can derail even the most promising arrangement.

To learn more about this topic, view Commercial Litigation Funding -101 / Litigation Finance Market Process. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about litigation.

This article was originally published here.

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