A lot has changed in business finance. The emergence of new technologies changing our daily lives, such as FinTech, EdTech and HealthTech, mean that Intellectual Property (IP) is attracting a flow of investment.
Alternative lenders see the commercial value in intellectual property assets. In particular, the potential for strong IP assets to increase in value over time, whereas tangible assets decrease in value. Consequently, they’ve found innovative ways to assess credit risk and use intellectual property as collateral to fund tech sector loans.
For companies operating in the tech sector, with intellectual property accounting for an average of 80% of their assets, the benefits are clear. Firstly, revenue-generating IP assets make you more attractive to investors. Then, an IP collateralised loan helps shareholders avoid putting their family’s financial future at risk by submitting personal guarantees. Beyond that, IP collateralised loans reduce dilution. And most importantly, IP lending reduces the cost of borrowing.
How do you extract the value from your intellectual property assets?
Get your IP valued
Seek an up to date, independent valuation of your IP. In particular:
- Hard IP assets – including trademarks, patents, copyright, designs and data.
- Soft IP – including goodwill, confidential information, know-how and trade secrets.
Use your IP as collateral for obtaining loans
Where conventional bank lenders still ignore IP as collateral to secure a loan, specialist lenders, including private debt funds, have stepped in to fill the gap.
With an IP backed debt finance loan, you can generate cash without diluting equity or tying up future revenue streams.
Moreover, because alternative financiers look for evidence that tech companies can repay loans from future equity and enterprise value (customer base, and IP), they can structure flexible and covenant-light terms.
Use IP to raise capital against royalties
IP royalty lending is a form of securitisation that allows tech companies to unlock capital tied up in royalty assets.
It works by giving tech companies direct access to capital in exchange for an agreed percentage of future revenues.
The benefits are clear:
- You retain 100% control of your IP
- No restrictions are placed on how you use the funds
- IP royalty lending is flexible and typically cheaper than equity
IP sale and license-back arrangements
For mid-market PE/Venture-backed companies who need to secure non-dilutive short term funding for event-driven activities such as expansion, an MBO or an acquisition, IP Sale and License-back arrangements are ideal.
Here you sell the payment flow deriving from your IP rights, e.g.royalties or licences to a specialist lender, for a lump sum.
In turn, your specialist lender places your IP into a holding company or special purpose vehicle (SPV). At the same time, you license back the use of your IP assets, as in a traditional sale and leaseback arrangement.
As a result, not only do you reduce the overall cost of capital, but also you:
- Retain complete control over your IP, as if you were the owner
- Get immediate capital to fund growth plans
- Avoid restrictive covenants associated with conventional lending
- Benefit from tax savings
- Have the option to repurchase your IP at the end of the contract
Who can access IP lending?
If you’re a tech company with few assets apart from your IP, then seek an independent valuation to see how much value you can extract from your IP.
Do you need to be profitable to access IP backed finance?
If you’re a pre-profit company that:
- Lacks a credit rating
- Lacks a track record of generating cash flows
- Has previously been denied finance by a traditional lender
But can demonstrate growing revenues, then you can access IP backed finance.
Typical uses include scaling operations, supplementing funding rounds and raising capital for event-driven needs such as an acquisition.
How do I find alternative lenders?
You can approach private debt funds directly. Alternatively, you can save time and money by talking to a specialist debt advisory and brokerage firm.
Key takeaways:
When you unlock the value tied up in your IP you:
- Avoid dilution of equity
- Reduce the cost of borrowing
- Mitigate the risk associated with giving personal guarantees
- Make your company attractive to investors
To leverage IP to boost your financial position, seek advice about setting up:
- An IP backed collateralised loan
- Royalty lending
- An IP sale and leaseback arrangement
If you’d like to help with unlocking the value tied up in your IP, drop us a line and we’ll set up a time to chat.
