A lesser-known use case of Intellectual Property is in securing loans. While most of us know Intellectual Property as intangible assets that help individuals and organizations protect their ideas, processes, products, and business, they can also be utilized to secure loans to help organizations direct capital to useful activities. As finance and research developed over the years, the role of intellectual property in securing loans has come to the forefront and has become a recently developed financial strategy to raise money.
As Collateral:
For small companies Intellectual Property plays a crucial role in securing loans. As equity financing is mostly off the table for such firms as it requires high dilution, traditional debt finance is also a big challenge as these firms might not possess tangible assets that can be used as collateral. Hence, IP assets hold immense value as they can serve as collateral for securing loans. Usage of these assets to secure loans is more common in industries where they drive value such as pharmaceuticals, technology, and entertainment.
Due Diligence:
The IP assets also play a vital role in deciding the terms of the loans. As lenders assess the intellectual property as collateral they check its quality, market value, legal scenario, and much more. This process is different for different types of IP assets. For patents it would be assessing their robustness, for trademarks their uniqueness, for copyrights their novelty and so on. For patents its important for the borrowers as well to carry out due searches to ensure there is no close similarity with other patents, a process is also known as ‘patent search’ (To conduct Patent Public search and review more material on the same – Patent Public Search | USPTO). If the due diligence proves that the IP is of great quality the borrowers may benefit by getting better payment terms on the loan.
For the Lender:
For the lender, IP assets serve a dual function. A good quality IP asset as collateral offers a consistent revenue stream and thus sells for a good price in the market, in case the borrower to default. The lender has limited downside risk in such cases. On the other hand, large lending corporations lend using traditional sources like usual loans and debentures and adding an IP-backed loan to their portfolio gives them diversification benefits further improving the risk-reward of the business. (For more detailed and country specific insights – Intellectual Property Finance (wipo.int))
In all, Intellectual Property plays an instrumental role in securing loans, although mass adoption is still to be seen. Smaller firms which have a strong IP portfolio can raise money through loans, while lenders can enjoy diversification benefits. To fully comprehend the dynamic space of modern lending, it is imperative to understand and appreciate how Intellectual Property serves as a mean to bridge the gap between capable borrowers and lenders.