Intellectual Property Loans: Everything You Need to Know
Intellectual property loans are ways to obtain capital by using your IP as an asset to secure funding.3 min read
2. Using IP as Collateral
3. IP-Backed Finance
Updated July 6, 2020:
Intellectual property loans are ways to obtain capital by using your IP as an asset to secure funding.
Using IP Assets to Finance Your Business
In order to strengthen your case for securing necessary business finances from investors, you may use your IP assets. You have options in lenders, such as the following:
- Financial institutions
- Venture capitalists
- Business angel investors
Any investors will typically assess if your small- to medium-sized enterprise, or SME, has protections for your IP, such as the following:
- Utility model
- Industrial design
They'll consider these IP protections when appraising your loan request. Having such protections in place is usually a good indication of how well your SME can perform in the marketplace.
IP ownership is important for convincing lenders of the array of market opportunities in commercializing the service or product in question. Sometimes, all it takes is a single, powerful patent to open doors to various financing opportunities.
Different investors may place different values on your IP assets, as well as assign different levels of importance to your IP rights.
There's a definite trend developing that makes a connection between a company's IP assets and its competitive edge. Lenders are increasingly interested in companies that have well-managed IP portfolios, although there are still issues — even in developed countries — with perfecting security interests in the IP arena.
As the owner of an SME, you must be very familiar with your IP assets' commercial value, and this includes understanding their proper valuation as well as their proper accounting in a balance sheet and accounts books.
Most importantly, be sure to place your IP assets in your business plan whenever you present it to potential lenders.
Using IP as Collateral
Securing traditional financial options may be too expensive or unavailable for many IP-centric businesses with cash flow constraints.
One increasingly popular business option is to use IP as collateral. This offers more financial opportunities for businesses with valuable IP assets that need alternative sources of capital.
Companies of all sizes need additional monies for various reasons.
Smaller companies and startups may need capital for starting or expanding operations, increasing or sustaining their spending on research and development, or complementary acquisitions. Startups often require short- or mid-term loans to supplement other funding.
Established companies may face a need to expand or handle marketplace challenges, along with other reasons for seeking additional financing. For instance, many companies had difficulty securing capital following the recession in 2009 as banks restricted the amount and number of business loans.
A realistic alternative to traditional funding options for some businesses is using IP as collateral.
Collateral may be a borrower's promise of specific property, including rights to the IP or future cash flows from existing assets, in order to give the investor recourse in case the loan goes into default.
From a historic standpoint, it's been rare to obtain financing using IP in one form or another, but it has happened. One well-known example of someone using IP as collateral involved Thomas Edison using his patent on the light bulb as collateral to obtain money to start his company, GE.
Recently, it's becoming more common for lenders to file liens against IP assets. 16 percent of U.S. patents have been used as collateral at some point.
IP-backed finance is a branch of finance devoted to intangible assets. The main goal in this finance field is unlocking the “hidden value” held in intangible IP assets. Although there's not a lot of data in this area, there are some IP-backed lending models that have proven successful.
In recent times, companies of various sizes have invested less in fixed or physical assets as they invest more in intangible assets. Recent banking initiatives that target growth businesses indicate the diminishing value of traditional fixed assets.
With more options in funding available, companies that need capital have more choices than ever in obtaining loans to help their businesses grow. Although IP doesn't have the same structure as tangible assets, it can still be very valuable.
Even traditional lenders are seeing the opportunities in offering IP loans, which only goes to show more industries recognizing the value in IP assets.
If you need help with intellectual property loans, 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.