Understanding IP-Backed Financing: An Introduction

Securities Backed Lending and Wealth Management: Opportunities and Challenges

IP-backed financing is the process in which intangible assets like patents, trademarks (to know more about patents and trademarks – Patent Basics|USPTO, Trademarks|USPTO) and copyrights are utilized as loan collateral. This alternative financing avenue is gaining traction, particularly among startups and SMEs, which may have a dearth of physical assets but an abundance of IP assets. This strategy enables such businesses to utilize their IP for funding, augmenting innovation, and expansion. However, there are some challenges, such as determining the precise value of IP assets and handling the risk linked to their fluctuating nature.

IP-backed financing can be divided into several categories based on the agreement structure and type of IP backing the financing as follows:

  1. Patent-backed: Widely used in the pharmaceutical and technology sectors, companies with valuable patents use them as collateral to secure financing.
  2. Copyright-backed: Copyrights can also be used as collateral. The most common use case for this is the entertainment and advertisement industry where movies, songs, and other forms digital media may use their copyrights to obtain financing.
  3. Trademark-backed: Corporations which have reputed brands and products which are household names may collateralize their trademarks. Although prevalent in the consumer and fashion sectors, companies in other sectors which have powerful brands may utilize trademarks for financing as well.
  4. Royalty Financing: If companies have an IP that is expected to have a consistent revenue stream in the future, using royalty-based financing could be a viable source of attaining capital.
  5. IP asset securitization: An alternative route for financing is via asset securitization. In this process a group of companies sell their IP assets to a SPV (special purpose vehicle) which then pools these assets together and sells shares to investors.

Although the advantages seem pronounced and obvious, there are some challenges that both lenders and IP owners face when getting into the IP-backed financing process. The following are some of the challenges commonly faced:

  1. Difficulty in ascertaining value: Unlike traditional assets like property or plant and machinery, assessing value for an IP is quite challenging. Also, apart from involving intricacies of multiple types of IPs and their corresponding valuation methods, IP valuation is highly subjective, reliant on market demand, and affected by legal constraints.
  2. Asset Volatility: While the value of some IPs remains stable over time, there are others wherein volatility in the value is extremely high, caused by technological changes, legal implications, and other demand drivers. Hence, it becomes a challenging endeavour for the lender to assess the value of collateral for IP-backed financing.
  3. Legal and regulatory challenges: Owing to the extremely intricate laws and regulations surrounding IPs and their potential to generate cash, most lenders prefer to stay away. This limits the available options for companies looking to get into IP-backed financing.

Having said that, there are several advantages of IP-backed financing that offer unique benefits to both lenders and borrowers. Some of the advantages are:

  1. Access to capital: For companies without access to common avenues of funding, IP-backed financing provides a great opportunity to finance for businesses with such assets.
  2. Impetus to innovation: As IP-backed financing offers a financial solution to companies that does not strain their resources as much as a non-collateralized loan, it promotes innovation, as companies realize an additional use for their IPs.
  3. Prevents stake dilution: For start-ups to raise money in most cases they must dilute ownership in the company. If such start-ups have IPs, they can be used to raise money without significant equity dilution.
  4. Value Unlocking: Some businesses possess an extremely valuable bunch of IPs. In such scenarios businesses may be able to unlock the value of the IPs by gaining financing through collateralization of them and using the funds to further improve research and development or other operations.

To read further on IP-backed financeIntellectual Property Finance (wipo.int)

To sum up, IP-backed financing is an excellent way to raise money for certain businesses. Even after taking into consideration the complexities involved in the process, the advantages outweigh the challenges. As start-ups and SMEs get an additional source of funding, interested lenders also have multiple channels to lend. Once more streamlined, the process of IP-backed financing will provide gains to both parties.

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