Updated November 26, 2020:

Intellectual property financing is a way for companies to secure funding or raise money using their IP assets. Companies may have their own reasons for raising capital, but more are increasingly relying on their valuable IP rights.

About Intellectual Property Financing

More people and businesses are becoming aware of the ability to monetize IP assets. You can sell, license, or use your IP rights as collateral for securing capital. IP assets can also give you additional ways to seek equity from private investors, friends, family, venture capitalists, and specialized banks or even regular banks.

In IP circles, there's growing interest in using IP assets, such as design rights, trademarks, copyrights, and patents, to gain access to credit.

Small- and medium-sized companies, as well as multinational corporations, are leveraging their IP assets to secure capital. More and more lending institutions are expanding their business to provide loans based on IP. 

IP rights are valuable assets that can be important financing sources. Companies that should look into IP financing include the following:

  • Growing businesses that don't have access to traditional lenders
  • Companies that hold valuable trademarks or patents
  • Older businesses looking to leverage additional assets in order to expand

Financing Practices

Most companies know about the traditional IP financing tools, such as the direct sale of trademarks or patents and licensing them for royalties. Today, more companies are interested in finding new ways to use intangible assets to raise money, including auctioning their IP. Auctions enable owners to gain quick access to funds. It also creates a market for buyers, which otherwise might not exist if not for auctions.

Another way to use an IP's value is by using it as collateral. Using IP assets as collateral can increase the amount of available credit for a company. 

For IP companies that have cash flow problems, it may be too expensive or impossible to get funding using traditional methods.

Startups and small businesses may need money for the following:

  • Starting a business
  • Expanding a business
  • Sustaining or increasing their R&D efforts
  • Complementary acquisitions

Startups often require short- or mid-term loans to supplement their funds. Mature companies may need financing due to marketplace challenges or a need to expand, among other reasons. The emerging option of being able to use IP as collateral gives a business with valuable IP assets the chance to utilize alternative sources of capital.

Typically, the following tangible assets are used as collateral for asset-based loans:

  • Inventory
  • Equipment
  • Real estate

Specialized lenders are usually the go-to's in the IP-collateral market because they offer a variety of financing options for companies wishing to secure funding by using their IP. However, more traditional finance companies and banks are entering this arena. 

There are many ways to meet a borrower's needs, and lenders and investors sometimes get creative. They may use traditional loans or mezzanine debt with equity conversion clauses. With the growing number of IP-backed transactions and the increased cash flow connected to IP licensing, more Wall Street and international financial markets are utilizing this form of financing.

While a legal mortgage is usually considered the most secure transaction form, it requires that an IP is assigned to a lender with the debtor being granted a license. This can create a problem in that the lender becomes the owner of the IP and controls the IP rights. It can also pose a risk for the debtor's ongoing business, as well as for the sub-licensees.

For some time, dealing in intangible assets has allowed rights owners to have easier access to funds. It's also a safer way for them to borrow. IP financing is most common in the music and film industries, but this practice is becoming more common in the software and biotechnology industries.

With the growing number of financing options, many businesses that may have had trouble in the past with traditional financing find it easier than ever to get the capital they need. This can be especially helpful for startups, which often don't have the necessary funds to adequately grow. The ability to use IP as collateral or auction it off gives businesses the chance to select an option that works best for them.

If you need help with intellectual property financing, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.