IPBlog has been looking recently at the problem lenders seem to have lending against IP. For example, banks typically do not lend money to finance development-stage companies or emerging technologies. They get involved when market acceptance of a technology-based product eventually translates into inventory and accounts receivable, assets that form the traditional basis for granting lines of credit. The overall trumping criterion is whether there is current, adequate, stable cash flow from the business to repay the loan within the stipulated time.
Though banks recognize established brands as assets, they are not comfortable quantifying brand values on their own. Valuable brands are seen by banks as adding only to the quality of the lending opportunity.
Other IP is certainly recognized, though intangibles not reflecting rights are seldom considered, and if they are not on the balance sheet, the assets take up little underwriting time.
To move the process forward, here’s what has to happen:
Banks need to realize the earlier a lending institution can safely get involved, the stronger will be the competitive position of the institution. In order to get comfortable with the process, the lender has to develop a way to value IP. (BVR’s IP Research is one good place to start, and there are many credentialed valuation analysts who can help.) In fact, in almost all of the explanations of reluctance to accept IP as collateral, securing a credible valuation is the primary factor.
Though the hurdle may be too high for banks’ underwriting to give a “yea” or “nay” on the basis of IP Research, such research can improve the overall quality of loans to technology companies.
The task where circumstances justify and credible valuations are attainable is to allow banks (for analysis purposes) to include identifiable intangible assets on an adjusted (not GAAP-compliant) balance sheet to reflect a more realistic picture of credit worthiness.
Longer term, an entity needs to emerge which will perform the underwriting necessary for intangibles-backed loans, and who will assume ownership of the IP or a brokerage function in the event of a default.