Litigation Funding vs. Bank Line of Credit

Litigation funding suits contingency fee firms whose primary asset is a docket of pending cases rather than predictable revenue or tangible collateral. It fits firms that need capital sized to the expected value of their caseload — for case costs, expert development, or operating overhead — but cannot offer a bank the balance sheet a conventional facility requires. Solo practitioners and small firms building a docket without a long financial track record are the most common users, since a bank has little to underwrite in a young contingency practice beyond the docket itself.

A bank line of credit suits any business, including a law firm, that can show conventional underwriting criteria: audited financials, predictable cash flow, tangible collateral, and often a personal guarantee from the partners. It is best suited to a firm with diversified revenue beyond contingency fees — a mixed hourly and contingency practice, for example — or to funding overhead rather than case-specific costs, and to firms with an established banking relationship and multi-year financial history a bank can actually evaluate.

Litigation funding is priced against the docket itself. The funder reviews case types, stage, expected recovery, and the firm's resolution history, then extends capital as a facility the firm draws against as cases develop. Repayment comes from case proceeds as matters resolve, and the facility is typically structured as non-recourse or limited-recourse to the firm. Draws are often tied to specific case milestones, and the funder periodically reassesses the docket as cases progress, resolve, or as new matters are added, adjusting availability accordingly.

A bank line of credit is underwritten against the borrower's financial statements and collateral, independent of any specific case. The bank sets a credit limit, the firm draws and repays like a revolving account, and the bank monitors covenants — minimum liquidity, leverage ratios, or covenants tied to accounts receivable — rather than case-level performance. Covenant compliance is typically certified on a periodic basis, and a breach can trigger a review or renegotiation of terms independent of anything happening in the firm's litigation practice.

Pricing reflects the risk the funder absorbs if cases underperform or resolve slower than projected, and is structured as a return on capital deployed against the docket rather than a fixed interest rate. Because the funder has no recourse to the firm's other assets in a non-recourse structure, pricing is set to compensate for that transferred risk, and typically runs materially higher than conventional bank pricing precisely because the funder, not the firm, absorbs the downside if the docket disappoints.

A bank line of credit prices off the bank's cost of funds plus a spread tied to the borrower's credit profile and collateral coverage, generally lower than litigation finance pricing because the bank retains full recourse against the firm and its principals regardless of how any individual case resolves. The spread narrows as the firm's financial profile strengthens and widens if collateral coverage or covenant compliance deteriorates.

In a properly structured non-recourse facility, the funder bears the risk that cases resolve for less than expected or fail outright — the firm's obligation is tied to case proceeds, not its general assets. Recourse terms vary by facility, and some structures carry limited recourse for specific circumstances such as fraud or misrepresentation in the original application, so firms should confirm exactly what happens if the docket underperforms before signing.

A bank line of credit carries full recourse. The firm — and often the partners personally, if a guarantee is required — owes the balance regardless of how the docket performs. A string of case losses or delayed resolutions does not reduce the obligation to repay principal and interest on schedule, and a missed payment or covenant breach can trigger default remedies entirely independent of the firm's litigation results.

Litigation funding wins when the firm's collateral is its docket rather than its balance sheet, when case timelines are uncertain, or when the firm wants case-level risk transferred to a capital provider that specializes in pricing it, particularly for younger or growing firms without the multi-year financial history banks require.

A bank line wins when the firm has the financial profile to qualify — collateral, predictable cash flow, personal guarantee capacity — and wants the lower cost of capital that comes with retaining full repayment risk itself, especially for financing overhead and operations that don't map cleanly to any specific case.