There is a peculiarity in the accounting treatment of litigation that most finance directors encounter only once they are already in the middle of it.
When a company pursues a legal claim, the costs of doing so are expensed immediately through the profit and loss account. They reduce operating profits in the period they are incurred. They do not create an asset on the balance sheet, despite the claim having legal status as a chose in action. And when the claim succeeds and a recovery arrives, it typically lands below the line as a non-operating or exceptional item, because the view of the accounting standards is that litigation is not a company's core business.
The result is an asymmetry that few financial frameworks handle well. The costs are visible and immediate. The potential recovery is invisible until it materialises. The drag on EBITDA is real and recurring. The upside, if it comes, is treated as a one-off.
What Changes with External Funding
Litigation finance does not change the underlying accounting standards. What it changes is where the costs sit.
When a third-party funder pays the legal costs of a proceeding, those costs do not flow through the corporate claimant's P&L. The company no longer has an outflow of cash to external lawyers appearing as an operating expense. Working capital is preserved. The EBITDA impact during the litigation period is eliminated entirely.
If the claim succeeds, the company receives a recovery reduced by the funder's agreed return. The net figure is lower than an unfunded recovery would have been. But it arrives without any preceding years of litigation expense, and it arrives as a positive event on a P&L that has remained clean throughout the process.
For businesses valued on earnings multiples and for those preparing for a sale, refinancing, or investor reporting, the difference between carrying litigation costs internally and externalising them can be material.
The Budget Approval Problem
Beyond the accounting mechanics, there is a governance issue that CFOs at European corporates encounter regularly.
Pursuing an affirmative claim through a standard internal budgeting process requires legal counsel to secure budget approval from finance against a cost that is certain and a recovery that is not. In practice, this often means that commercially strong claims go unpursued, not because anyone has concluded they lack merit, but because the financial framework does not have a natural home for speculative future income set against definite current expenditure.
Litigation finance removes that tension entirely. The funder bears the cost. The company does not seek internal budget. The CFO does not need to defend an open-ended legal spend commitment in quarterly reviews. The claim is pursued if it has merit, not if it happens to survive the budget cycle.
Treating Claims as Assets
A growing number of European finance directors are beginning to apply a more explicit asset-framework to their legal claims portfolio. This means identifying claims with genuine recovery value, assessing them against a set of criteria similar to those a funder would apply, and making a deliberate decision about whether to pursue them internally, fund them externally, or in some cases monetise them by selling or assigning the claim.
This shift is partly a result of growing familiarity with litigation finance as a product, and partly a response to balance-sheet pressure. In an environment where capital allocation decisions are under greater scrutiny, the idea that a business might be sitting on a portfolio of valuable claims and not pursuing them because of internal cost constraints is increasingly difficult to justify to shareholders.
The companies that have made this shift tend to involve their CFO and general counsel in a joint review of pending and potential claims at least annually. The output is a structured view of the claims portfolio that treats affirmative recoveries as a managed asset class rather than an administrative by-product of doing business.
Practical Considerations
Not every claim is a candidate for external funding. Funders apply consistent criteria and decline the majority of cases they review. That selectivity is a feature, not a failure of the product.
But for CFOs who have never systematically assessed their pending claims against those criteria, the exercise itself is often revealing. Claims that have sat dormant for years because no one identified a funding path frequently turn out to be fundable on their merits.
The first conversation with a litigation funder does not require a fully formed case file. A brief overview of the claim, an estimate of the damages, and a sense of the defendant's financial position is enough to generate an initial view on fundability within days.
A Different Kind of Capital Allocation
Litigation finance is, at its core, a capital allocation question. A company that chooses to bear litigation costs internally is making an implicit decision to deploy its own capital into legal proceedings. A company that externalises those costs to a funder is making a different allocation decision: accepting a lower share of the eventual recovery in exchange for preserving working capital and removing earnings volatility during the period of proceedings.
For most CFOs, that is a trade worth considering. The question is no longer whether litigation finance exists as an option but whether the company has a process for identifying when it applies.
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