INSIGHT

Unlocking the potential in IP assets as collateral for finance

By Tess Kirkinis
Intellectual Property Patents & Trade Marks

In brief 2 min read

Companies should seek to make the most of their intangible assets. One way to do this is to use intellectual property assets as collateral to access funding. IP-rich businesses, SMEs and start-ups should keep this potential avenue in mind.

Who is this relevant to?

This is relevant to intellectual property-rich businesses that are seeking to unlock the value in their intellectual property, to lower the cost of borrowing or to broaden the range of available debt providers. It is also relevant to SMEs and start-ups that cannot access sufficient debt using tangible assets.

Intellectual property and finance

Debt, equity and securitisation

The interaction between intellectual property and finance was popularised in 1997, when the late David Bowie issued asset-backed bonds that entitled investors to a share of royalties generated from some of his albums over 10 years.

Fast-forward to today:

WIPO has reported that there are likely to be more opportunities for securitisation as cash flows are generated by intellectual property and as intellectual property exchanges come to the fore: see The Securitization of Intellectual Property Assets – A New Trend.

Start-ups and SMEs commonly use their intellectual property to raise capital.

Moreover, the value of intellectual property provides an opportunity, albeit not front-of-mind, for companies to use these assets as collateral for debt. IP Australia has recognised that companies are becoming more interested in this avenue: see IP Australia and the Future of Intellectual Property. In addition, the Intellectual Property Office and British Business Bank released a report that considered the potential for using intellectual property as collateral for growth debt finance: see Using Intellectual Property to Access Growth Funding.

Ownership

For the purpose of using intangible assets to access debt, intellectual property assets that can be owned and enforced against third parties (and can generate a revenue stream) are key.

This includes registered patents, registered designs and copyright.

Trade marks are more problematic, as the owner is required to exercise quality and financial control of an authorised user of the mark. It is important to ensure that finance arrangements do not compromise the trade mark's validity.

Obstacles

There are potential obstacles, or barriers, to using intellectual property rights to access debt.

Finance was historically designed to support an economy involving tangible assets with established ways to determine and realise value. In this context, and compared with tangible assets, intellectual property rights may be more difficult to value (as there is no single market-wide or agreed methodology), and enforcing intellectual property rights can be more expensive and time-consuming.

From a company's perspective, using intellectual property rights as collateral renders such assets more difficult to liquidate. It may result in a company having less autonomy and control over its intellectual property portfolios over which a lender has security.

The future

Despite these potential obstacles, companies should make the most of their intellectual property, not only through equity but also through debt. This is particularly relevant as investments in intangible assets become increasingly important in Australia and abroad.