Mistake #1: Accepting the First Offer
This is by far the most expensive mistake in litigation finance. Many firms accept the first term sheet they receive, assuming rates are standardized. They're not. We regularly see rate spreads of 6-10% between the most and least competitive offers for the same deal. A firm that accepts an 22% rate when a 14% offer was available on the same portfolio is leaving hundreds of thousands of dollars on the table. Always get multiple offers.
Mistake #2: Ignoring Waterfall Provisions
The waterfall, the order in which settlement proceeds are distributed, is where many firms get caught. A poorly structured waterfall can mean the lender takes their cut before you cover case costs, leaving your firm cash-negative even on successful settlements. Always review the waterfall carefully and ensure your firm's economics are protected before the lender's return is calculated.
Mistake #3: Undervaluing Your Portfolio
Firms routinely present their portfolios in ways that undervalue their cases. Generic case lists without stage information, missing medical documentation, and unrealistic timeline estimates all signal to lenders that the portfolio is higher risk than it actually is, resulting in worse terms. Invest time in presenting your docket accurately and completely. Our memo team exists specifically to solve this problem.
Mistake #4: Not Understanding Covenants
Credit facilities come with covenants, financial ratios, portfolio composition requirements, and reporting obligations your firm must maintain. Violating a covenant, even inadvertently, can trigger default provisions and accelerated repayment. Read every covenant, understand the consequences of violation, and make sure your firm's financial systems can track compliance automatically.
Mistake #5: Waiting Until You're Desperate
The worst time to seek financing is when you desperately need it. Lenders can sense urgency, and desperate firms accept worse terms. The best time to establish a financing relationship is when your firm is performing well and your portfolio is strong. Build your capital relationships proactively, before you need them. Firms that plan ahead consistently get better rates and more favorable structures.