A Pennsylvania snack food company used it to secure a $9 million loan. A Furniture Company in Los Angeles used it to get a $6 million dollar loan. A surf apparel company used it to get a $5 million dollar loan. And Toys “R” Us used it to secure over $5 billion.
Using intellectual property to secure a loan is not new. Take a look at the assignment records at the USPTO and you’ll find out how often it’s used. Similar to tangible asset financing, your IP (i.e. intangible asset) can be used as collateral or security to get a loan. The lender is extending you credit (i.e. loan) based on the value of your IP assets. It’s the collateral to minimize losses in the event you default.
Finding a traditional funding source is challenging, especially if you’re a start-up. In many cases, this type of financing is often unavailable or too expensive. If you’re business is built with intellectual property, your IP is an asset you can use to secure a business loan.
Similar to loans secured by tangible assets, such as inventory and real estate, your IP is used as collateral for the loan. The lender gets a security interest in your IP. If you default on the loan, the lender gets your IP.
To qualify for the loan, your IP must be valuable. This is determined by it’s use in the marketplace, either from revenue generating products or services, or royalty revenues from licensing agreements.
IP-backed loans are primarily offered by specialty lenders who offer a number of financing options. These firms offer financing either directly or as intermediaries between borrowers and commercial lenders, such as banks. In recent years, a number of traditional banks and finance companies are also now getting into the IP loan market.
Another variation in IP financing is a Credit Enhancement Company (CEC). They work with traditional lenders such as banks who are not familiar with IP. Similar to real estate appraisers, they do an evaluation of your IP, and provide an analysis verifying it qualifies as collateral. CECs also guarantee the repayment of your loan to the lender.
Some of the big advantages of using IP financing include securing more working capital without diluting equity, immediate access to funds, lower cost of funding, retain ownership of your IP, and flexible financing options.
In return for the loan, you’ll be restricted on what you can do with your IP. For example, you won’t be able to sell or assign it without paying off the loan. You’ll be obligated to pay all fees to keep up your IP registration, such as maintenance fees for patents. And there are often limitations on more debt or restrictions on securing other types of loans. If you default on the loan, the lender will get ownership of your IP.
Here are a couple of key points to keep in mind to qualify your IP assets for a loan.
- Make sure you’ve got an inventory or your IP assets and protected them.
- Get a professional IP valuation that shows the value of your IP separate from your business
- Show the value of your IP, either through licensing agreements or products on the market
IP-based loans are often a good option if your company lacks any tangible assets, has a low or no credit rating, and lacks enough cash flow to qualify for conventional business loans or lines of credit.
Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses of all sizes use licensing to turn their IP into income-producing products, services, and technologies. His decades of experience run the gamut from medical devices to food technology to consumer products. He’s licensed some of the biggest Hollywood entertainment blockbusters including the Batman Movies (1 and 2), and the number one kid’s action TV show, the Mighty Morphin Power Rangers. Rand speaks about licensing and is a featured speaker at investment conferences, trade shows, colleges and startup events. He’s a published writer with articles appearing in several prestigious trade magazine including The Licensing Journal, Intellectual Property Magazine, and License India. Rand also mentors at the Cal State Fullerton School of Business and Economics and is a judge for their startup business plan competitions.