As an SME in the technology sector, do you need to raise capital but want to avoid giving away equity? shareholder dilution may not be the only option.
The following article looks at Intellectual Property Financing for the SME market.
In the 1880’s Thomas Edison used his patent on the incandescent light bulb as security to borrow money to launch the General Electric Company, so the principle of using IP and intangible technology assets for borrowing is not new, but it is a growing and available finance alternative.
Every business on its journey need to access capital for a variety of reasons. Young companies often need finance to cover increasing research &development spending, expanding operations or cover between rounds of funding. Established companies need to react to market place pressures, find growth cash flow and cover any number of different challenges.
The desire to enhance innovation is vitally important if we want to continue to grow and compete in the World wide market, and access to financing is therefore critical. Following the 2009 recession companies are still experiencing difficulty in securing capital as banks restrict the number and amount of loans to businesses. Fortunately, for some companies a realistic alternative to high street borrowing or high net-‐worth equity based investments is collateralisation of their IP assets.
Normally tangible assets like equipment, inventory and real estate are used to secure asset based loans, as the value at which these can be sold can be predicted with a high level of confidence. However, by using their IP as collateral companies can dramatically increase their asset base value and therefore the amount of available credit. IP as a stand alone or pooled with the tangible assets can make a much stronger case and the potential for a successful loan is increased.
Historically the issue for the SME market has been that IP and its value is seldom visible in company accounts and is specific to a company’s operation, making valuation difficult and in general due diligence on intangibles is complex and expensive. For these reasons high street lenders have generally shied away limiting options.
However, following the increase in specialist financiers operating in America (16{537e7721938d12ea9ea95a8895d0499f26d47119b5f96ac7e0b5084187fe6d57} of US patents have been pledged as collateral at some point) we are seeing a reflected increase in UK based companies that have both the appetite and the knowledge to grow in this sector.
If IP based finance is an option you want to consider, these are the questions you need to answer:
- Is the intellectual property currently in use?
- Is there a commercial revenue stream attached to it?
- Is it owned by the company?
- Can it be valued? (And if so at what value?)
- Can a lender take security?
- Is there a patent or patent pending?
If the answer to these questions is YES then it can potentially be funded with four clear benefits:
- Avoids existing share holder’s dilution.
- Can be part of a combined equity/debt package.
- Establishes a credit track record (Important for a young business).
- Delivers working /investment capital, enabling SME’S to lift of and grow.
This may be the solution you need, but as always there are a couple of cautionary points as well:
- If the IP is the company’s main asset, a default on a loan secured against it could result in the loss of the IP.
- Although it’s a growing sector, at present there are limited lenders and therefore it may be more expensive than traditional finance options.
IP financing is of key importance for SME’s to achieve their economical goals.
Written by Mike Horn Director of Primary Business Finance limited on 9-‐10-‐2017.
To discover more about the finance options available contact me on mike.horn@primarybusinessfinance.co.uk or 07912 842665, always available for an informal chat.
