Creating Financeable IP
• 20 Feb 22
With the steady advancement of science and technology, the trade industry has cleared a path for innovative methods and modern ways of conducting business. The use of Intellectual Property (IP) has emerged as a foundational asset for businesses in need of funding. Much like tangible assets are used as collateral against a bank loan; professionals seeking financial assistance have the option of pledging the rights to their IP when applying for credit or government subsidies. In this article, we take a closer look at how IP can be used as financeable collateral for growing and existing businesses.
What is intellectual property financing?
Businesses around the world are becoming increasingly aware of their ability to sell, license or use IP rights as a way to secure capital. Intellectual property financing acts as a vehicle for companies to secure financial assistance by using their IP assets such as design rights, trademarks, patents, copyrights and trade secrets to secure access to credit or business subsidies.
Small, medium and large corporations are using their IP assets to acquire capital for their businesses while more banks and lending organisations are permitting the use of IP as the security deposit for a loan.
Although it is intangible, the rights to IP can be a hugely valuable asset in the modern economic climate, as it often offers a competitive lead against other business entities and can increase company asset value. Companies who stand to benefit most from IP financing include Startups, companies with valuable trademarks and older, established businesses who are looking to expand.
How can IP be used as collateral?
Using IP as collateral for a loan is one of many ways to tap into IP-backed financing.Though not always the case, this method has often been used as a final show of faith by companies on the brink of bankruptcy. When there are no longer tangible assets to pledge against a financial loan, a company’s IP is considered and ultimately approved based on its valuation. For example: using the patents of a successful company’s trademark item as collateral for a bank loan. In this case, the bank is authorized to seize the patents if the client is unable to pay their debt, making the use of IP as collateral a high risk situation.
Other ways of using IP as collateral includes pledging trademarks and trade secrets, as well as auctioning IP. A valuable portfolio of IP must be sufficiently protected and managed, with a clearly outlined strategy as to how a company may use IP assets to achieve their financial goals.
For Startup businesses and smaller organisations, IP-backed loans are a great way to gain access to the funding needed to advance their businesses. When lacking tangible assets and capital, an IP-backed loan provides a modern solution to an age-old problem faced by business owners: financial support.
The sum of money a business owner is permitted to borrow from a bank or external lending organisation on the basis of an IP-backed loan is determined by the overall value of the company’s IP portfolio, and the potential risk associated with the transaction. Because the value of IP is based on speculative suggestion, experts are brought in to conduct a thorough investigation of the necessary criteria to approve an IP-backed loan. Any asset provided as the collateral for a loan only has value if it is correctly secured and well documented. Safeguarding the security interests for intellectual property is not as clear-cut and regularly conducted as with tangible assets such as property.
IP Sale - Leaseback
The definition of leaseback is described as a financial transaction whereby an individual or entity sells an asset, then leases it back on a long-term basis. In essence, the asset is still available for use by the original owner, but a legal change of ownership has taken place. An IP sale-leaseback involves an investor who has acquired IP from a company, who then charges the original owner a leasing or licensing fee for use of the asset. In most IP sale-leaseback agreements, the seller is given the option to repurchase ownership of the IP within a set and agreed upon timeframe.
IP Legal Finance
Due to the rapidly evolving world of business and innovation, more and more cases of infringements on patents and trade secrets are emerging. Through the IP legal finance structure, IP owners have the option to access funds in protection of any possible future legal battles pertaining to infringement and contravention lawsuits. Backed up by solid results, IP legal finance has become a favoured medium of financing for investors. The funds provided by the legal finance structure will cover general operational expenses, as well as administrative fees used to build a strong case against the opposition.
Advantages of IP Finance
There are many advantages to IP finance, which includes:
- There are little to no fees associated with IP finance. Additionally, recapitalization by means of IP finance allows for an increase in liquidity of projects with compensation that outweighs any expenditure.
- Gaining a competitive edge over other businesses in the same field through access to exclusive IP
- Enhances company value and creates flexibility to restructure a company by utilizing IP finance facilities that holds significant leverage
- Helps to obtain funding for a business
Disadvantages of IP Finance
While there are several advantages, there are significant disadvantages to IP finance too:
- Owing to its unique structure, IP Finance can often prove to be more expensive than other financing options in the long-run.
- The valuation processes used in IP financing is commonly based on a value that will give way to a less favourable financial figure for borrowers and often benefits the lender in the case of a default (liquidation)
- The value of IP assets are usually based on the demand for it in the secondary market. But lending organisations can find it challenging to find prospectively ground-breaking IP
- Technical defaults in the financing arrangement could lead to a failed arrangement and eventually, reduced quality of intellectual property and assets associated with the IP.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.