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Can
Your SME Use Intellectual Property Assets for Financing?
In recent years, there is growing awareness that intellectual property (IP)
assets can be monetized.
There are various ways to do so. IP can be sold,
licensed, used as collateral or
security for debt finance, or it can provide an additional or alternative basis
for
seeking equity from friends, family, private investors (the so-called
“business angels” who invest in unquoted small and medium-sized enterprises (SMEs)
and often also provide experience and business skills),
venture capitalists, specialized
banks
and some times even from regular banks.
In addition, in most countries, the Government provides encouragement and
support to high-tech start-ups and
other
innovative
SMEs through grants, guarantees, subsidies and/or soft loan schemes, which are
provided via various public funding institutions and banks that directly or
indirectly recognize the importance of intellectual property assets.
As an owner / manager of an SME, therefore, it is important for you to look
after the intellectual property of your SME not only as a legal asset but also
as a financial instrument.
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Using
Intellectual Property Assets to Finance Your Business
Intellectual property (IP) assets may help you to strengthen your case for
obtaining business finance from investors/lenders. The investor/lender, be it a
bank, a financial institution, a venture capitalist, or a
business angel, in
undertaking an appraisal of the request for equity assistance or loan, will
assess whether the
new or
innovative products or service
offered by the SME is protected by a
patent, a
utility model, a
trademark, an industrial design,
or
copyright or related rights. Such
protection is often a good indicator of the potential of your SME for doing well
in the marketplace.
IP ownership is thus important to convince investors/lenders of the market
opportunities open to the enterprise for the commercialization of the product or
service in question. On occasions, a single powerful patent may open doors to a
number of financing opportunities.
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Ownership of IP rights over the creative output or
innovations
related to the products or services that an enterprise intends to market,
guarantees a certain degree of exclusivity and, thereby, a higher market share
if the product/service proves successful among
consumers.
Different investors/lenders may value your IP assets in different ways and may
attach different degrees of importance to IP rights. A clear trend, however, is
developing towards an increasing reliance on IP assets as a
source of
competitive advantage for firms. Thus investors/lenders are increasingly
focusing on firms with a well-managed IP portfolio, even though they encounter,
even in the developed countries, many new problems and issues while trying to
perfect security interests in intellectual property.
As the owner/manager of an SME, you
must therefore take steps to understand the commercial value of the IP assets of
your SME, ensure their proper valuation by professionals if need be, and
understand the requirement(s), if any, for their proper accounting in the
accounts books and
balance sheet.
Above all, make sure to include the IP assets of your SME in your
business plan when presenting it to potential investors/lenders.
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The
Securitization of Intellectual Property Assets – A New Trend
Lending partly or wholly against intellectual property (IP) assets is a recent
phenomenon even in developed countries. Collateralizing commercial loans and
bank financing by granting a security interest in IP is a growing practice,
especially in the music business, Internet-based SMEs and in high technology
sectors.
Securitization normally refers to the pooling of different financial assets and
the issuance of new securities backed by those assets. In principle, these
assets can be any claims that have reasonably predictable cash flows, or even
future receivables that are exclusive. Thus securitization is possible for
future royalty payments from licensing a
patent,
trademark or trade secret, or from
musical compositions or recording rights of a musician.
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Importance of Proper
Valuation of IP for Obtaining Finance
While securitization appears to be gaining ground, conventional lending remains
the main source of external finance for most SMEs. The practice of extending
loans secured solely by IP assets is not very common; in fact, it is practiced
more by
venture capitalists than by banks. If you seek to use IP assets as
collateral to obtain financing, your IP assets stand a greater chance of being
accepted as collateral if you are able to prove their liquidity and that they
can be valued separately from your business. Furthermore, you have to show that
your IP assets are durable, at least for the period during which you have to
repay the loan, and marketable in the event of foreclosure or bankruptcy.
In this respect, it is critical to identify all the IP assets of your SME and to
obtain an objective
valuation of the identified assets from a competent valuation firm. The
value of IP management processes which identify, log, track and quantify your IP
assets becomes increasingly important in the Internet economy. This is one more
reason for you to increase in-house awareness of the extent and value of IP
asset holdings, including
trade
secrets, which might be used to collateralize a loan.
It is true that until now the valuation of intellectual property is considered
to be highly subjective by both lenders and borrowers. While
well-founded valuation methodologies exist, they are either considered to be
too subjective or are not generally understood by most people. However, the
increasing use of royalty streams arising from licensing to determine the value
of intellectual property is a welcome development in enhancing the acceptability
of intellectual property assets as valuable assets providing security for
debt
financing and equity participation.
As an SME, it is therefore important to keep this aspect in mind while seeking
financial assistance in particular, and while developing your
business strategy
and business plan
in general.
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