What Are the Attractions of IP-Backed Finance?
- Improved security: at present, any charge placed over a business’s IP and intangibles tends to be floating rather than fixed, weakening its effect if the business gets into difficulties. Defining IP assets as part of a lending agreement puts a bank in a much stronger position with an administrator or insolvency practitioner.
- Potential for value appreciation: the IP assets of a well-run business will increase in value over time, whereas most of their tangible assets will reduce in value.
- A wider pool of assets: lenders often face situations where existing good customers want to borrow more than established asset lending ratios will allow. The value contained within core intangible assets provides a means to lend more, but with increased security.
- Stronger repayment incentives: where intangibles are core to business activity, they provide a powerful incentive for borrowers to honor their repayment commitments.
- Alternative to personal guarantees (PGs): lenders recognize the complications which arise from requesting PGs for business transactions. IP and intangibles provide an additional source of security and/or “comfort” which is directly related to the company, not an individual.
What Are the Challenges of IP-Backed Finance?
- Visibility: despite its importance, and the amount invested in it by large and small businesses, internally generated IP is seldom represented on company balance sheets. It is, therefore, incumbent on a company’s Directors to understand and explain their IP and intangibles in language a lender will understand. If awareness is lacking in either or both parties, this acts as a hurdle.
- Better informed lending decisions: obtaining insights into off-balance sheet assets (which generally include most, if not all, of a business’s IP and intangibles) provides lenders with a more representative picture of a company’s resources and value.
- Value attribution: unquoted companies do not have access to a market mechanism to measure and demonstrate the intangible (off-balance sheet) value attributable to their businesses.
- Value realization: many tangible assets have a realizable disposal value, even if it is a fraction of the new (originally funded) cost. Markets for resale of IP and intangible assets exist, but are presently less formalized and offer less certainty on realizable values.
- Value risk: some intangible assets, such as brands, can be subject to rapid value changes depending on the fortunes of the companies that own them.
- Value understanding: lenders need to gain confidence in managing the particular risk profiles associated with these assets. This involves familiarization, training, and the adoption of recognized standards for intangible asset value management.