IP risk assessment for banks and lenders
In the UK, banks are working hard to find the best way to lend the capital high-growth SMEs need using their intellectual property (IP) assets as security.
This is very different to the traditional lending environment in which banks would historically have valued ‘physical’ assets like property, equipment, and inventory as security. As we move towards a more innovation-driven economy, the highest growth companies tend to build value in intangible assets rather than bricks and mortar or stock.
IP is the most obvious and often most valuable of those intangible assets. However, as such assets are more technical in nature and less amenable to “traditional” valuations, even companies with the brightest of futures on paper can struggle to secure the funding they need to take the next step. Some experts fear has created a “funding gap” that could total £15 billion each year in the UK alone.
Thankfully this position is changing.
Financial entities are increasingly acknowledging the existence of IP is a strong value indicator, as long as it is underpinned by a robust and carefully thought-out IP management and protection strategy.
Many banks have now recognised they need to offer loan products that match not only the ambitions of a modern, asset-light business but also the way they operate by offering loans based upon an estimated value of their registered IP.
This could prove a highly attractive borrowing option for IP-rich companies who would prefer to secure direct finance rather than onboard investors in return for equity.
WHAT ARE THE RISKS FOR IP-BASED FINANCE FOR BANKS?
Although the importance of IP as an asset class against which security can be granted continues to grow in the eyes of many banks, there are, of course, risks associated with IP-based finance.
While some banks consider using intangible assets like IP as collateral for loans to be too difficult a task, there is a growing band of forward-thinking lenders that are actively looking for an assistance with the challenges of lending against IP and intangible assets and the risks which can be associated with this.
Even though it has been conclusively proved that – most notably by the British Business Bank and the UK Intellectual Property Office (UKIPO) – IP-rich companies can represent lower lending risks, any lending decision still needs to be based on an understanding of:
- The IP the company owns or has rights to use
- How that IP maps to their business plan
- What role the IP will play in ensuring a successful future for the company (up to and including exit if that is the objective)
- Any known threats to the validity or ownership of that IP
This is exactly the insight the IP due diligence specialist in Potter Clarkson’s dedicated investor team can provide.
HOW CAN IP DUE DILIGENCE LOWER THE RISK OF OFFERING IP-BASED FINANCE?
Firstly, it is important to acknowledge our approach to IP Due Diligence (IPDD) is probably different to those you have seen before. IPDD can easily become an impenetrable, paper-heavy exercise that delivers little value beyond a comprehensive list of IP rights. Our approach is much more commercial and much less time consuming.
When we talk about IPDD we mean providing an incisive red flag review – delivered at a competitive fixed price – that identifies areas of potential concern and explains, in a concise report, why these issues require further consideration and what might be done about them.
We know you are experts in valuing assets for debt financing, loans and similar financial arrangements. Our job as experts in the technological areas to which this IP relates (and the law around them) is to efficiently and cost-effectively support your assessment with an overview of the relevance and strength of the IP in context of the loan applicant’s business plan.
We do this by independently examining:
- The company’s business plan from an IP perspective (including, where relevant, their technology roadmap).
- Whether the IP strategy they have in place is appropriate or whether a more structured IP strategy should be created.
- Whether the IP they have covers the company’s products and services, or alternative rights need to be applied for.
- The licenses, agreements, and other commercial contracts the business has entered into so we can confirm the impact of these on the IP they own and use.
- The legal ownership of their IP.
- The way they manage their IP (is it a Board level consideration or is it managed at a lower level?).
- The way they work with third parties and the impact these agreements could have on their future and their future IP strategy moving forward (again including confirmation that the required agreements are in place to define/support these relationships).
- Their attitude towards IP-related risks, including – most critically - their approach to freedom to operate (FTO).
This is a proven approach we have developed over the last 20 years whilst working closely on IPDD assignments with financial institutions, investors, law firms with other specialist professionals.
It is designed to provide you with a straightforward, clear, and tailored overview you can use to verify the IP position of the company seeking finance so that you can make the most informed decision regarding IP-based financing.
If you would like to find out more about our approach to IP due diligence and discuss how we could support your institution’s IP-related lending processes, please contact us today.
