Written by: Caldwell

For the past 40 years, tangible assets comprised about 80% of a company’s assets. However, in the past several years, a sea change has occurred. Today, tangible assets comprise a scant 10% of the S&P 500 companies’ value. What comprises the other 90%? Intangibles like patents and other intellectual property (“IP”). This new shift in business valuation away from physical assets has very recently begun reflecting into capital-raising efforts. That is, companies can now leverage their intangibles (like IP) as collateral for loans intended to fuel growth. This is a brief overview of these emerging IP-backed lending practices and how and when companies are utilizing those tools.

The Fund Raising Process

A good first step in pursuit of IP-backed fundraising is to identify and inventory your company’s IP. Those assets include traditional IP like patents, trademarks, and copyright material. But they also include less obvious intangibles like a company’s know how, business processes, or other proprietary information, some of which may be protectible as trade secrets. In the context of fundraising, IP is principally valued in relation to IP-backed loans, IP sale-leaseback, IP legal finance, and IP royalty securitization.¹

Once a company has a grasp on what IP it holds, it can then consider having its IP portfolio valued. “A company’s intellectual property can provide an indicator of a firm’s value and support financing decisions,” providing lenders a collateral basis for lending.² Lenders often assess the IP based on its liquidation value for protection against borrower default, in which case the lender may monetize borrowers’ pledged assets in efforts to recover losses. Valuation can also support other aspects of lending. For example, Aon’s newly established IP brokerage program utilizing collateral protection insurance (“CPI”) insures the value of collateralized IP to be 90-100% of the loan amount, offering the lender assurance of its ability to recover with the IP collateral.³ Businesses interested in that program must have their IP portfolio assessed and evaluated. Lenders often require their own valuation, so a prospective borrower should work with their prospective lender on the timing and details of valuation.

When Do You Jump In?

When should a company consider being evaluated for IP-backed loans? A recent panel that hosted business experts in the legal, fiduciary, and brokerage sectors broke down the details of this emerging lending process. These programs are looking for companies that need financing for commercialization purposes, not for marketing and R&D funding. The most opportune time for firms to consider obtaining capital through IP-backed lending is when they have already raised some equity and require runway capital. More precisely, these programs are meant to be used as leveraging tools for companies looking to take the next big jump, not for ones just starting out. Accordingly, companies seeking this form of lending should also have revenue and some minimum IP portfolio. For example, AON’s CPI program generally requires applicants to demonstrate a minimum of 10+ families of IP assets along with a strategy of how they will be used to generate value for the company. They generally also must show positive cash flow projections of around $5 million to qualify for these pure-debt, CPI programs—through which businesses have recently received between $15-100 million in financing.⁴

Where Do You See Your IP In The Next 3-5 Years?

Utilizing a company’s intellectual property may offer borrowers reduced risk and increased liquidity by leveraging their company’s IP portfolio. These new fundraising practices demonstrate that an IP portfolio’s value does not rest solely on its capacity to secure exclusive use in a market. Rather, its value includes enabling other business opportunities like opening the firm to credit markets for service-based businesses looking for financing. Whether IP-backed financing will be more or less expensive than traditional financing will ultimately depend on the particular circumstances.

Key Takeaways

Leveraging an IP portfolio to support debt financing could prove more affordable and viable for growth-stage companies compared to more traditional, hard-asset-backed lending. IP-backed loans provide an alternative for companies to propel their business growth when they have developed or acquired sound IP. This emerging financing method could be justified for companies looking meet high capital needs if their forecasted revenue is on track to pay it back. We look forward to following these emerging practices closely as companies continue to find innovative ways to extract value from their IP.

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1. https://www.forbes.com/sites/forbesfinancecouncil/2022/01/31/what-is-intellectual-property-ip-financing-and-why-you-should-know/?sh=4604a41241c1

2. https://www.wipo.int/sme/en/ip-backed-financing-for-policy-makers.html

3. https://www.aon.com/intellectual-property/intellectual-property-backed-lending.jsp

4. https://www.marsh.com/us/services/financial-professional-liability/products/intellectual-property-insured-financing.html