Intellectual Property Financing

 Increasingly, companies are turning to intellectual property financing as a way of raising capital. IP-backed loans enable a company to raise funds without having to turn to venture capitalists.

These transactions are relatively new and haven't caught on quite yet, but they do offer some significant advantages over traditional debt financing. Creditors need to consider some key issues when extending loans secured by intellectual property assets, such as collateralization and valuation.

Collateralization

Collateralized financing is a type of financing where an asset serves as security for the loan. The collateral can be related to the original transaction (as in the case of a budget loan for a new airplane) or unrelated (as in the case of a loan for the sale of oil receivables).

For example, Xerox pledged patents as collateral when it faced financial distress in 2002 and Eastman Kodak pled its copyrights when it was hit with financial distress in 2014. Companies like Kingfisher Airlines have kept their trademarks as security for loans that were advanced by banks in 2009. This approach to using intellectual property as a security has been around since the early 1900s.

In this model, a lender extends credit using intellectual property assets as collateral and, in the event of default, is entitled to foreclose on the assets. However, if the intellectual property is not properly perfected as security, then the lender can lose the collateral and may be unable to recover its loss.

Using intellectual property as collateral can be a good way for rights owners to access capital for expansion and growth. This can help them move into new markets, hire more employees and improve their office LAN.

Some companies are better suited for collateralized financing than others. For instance, smaller companies may find it easier to get loans with a lower APR because they often have a shorter history of making payments.

Companies that are growing quickly, especially in the tech sector, may also benefit from collateralized loans. These businesses need working capital to grow and need a cushion to avoid choppy cash flow, late payments or seasonal effects that can slow their growth.

For these reasons, many companies choose to use IP as a collateral to secure their loans. This practice is called intellectual property financing and is becoming increasingly popular as companies become more reliant on innovation and research and development.

Aon offers a comprehensive portfolio of innovative financing solutions that help borrowers and lenders unlock the value in their intellectual property. This includes a market-leading, proprietary IP valuation tool that provides the lender with a valuation that is guaranteed to be worth no less than 90-100% of the principal loan amount. In addition, Aon has access to discretionary lending capital that can be used as a source of additional funds for IP-rich businesses. www.belgraviapropertyfinance.co.uk/services/development-finance/

Valuation

Valuation is an essential part of any intellectual property financing transaction. It helps to establish a company’s value and enables investors and lenders to make informed decisions about the investment. A valuation can be conducted on an absolute basis or in relation to other similar companies and assets.

The methods used to arrive at a valuation can vary widely depending on the purpose of the analysis, as well as the risks involved. This is particularly true when it comes to valuation of intangible assets, such as patents and trademarks.

Typically, business valuations are done by professionals credentialed in business valuation. They perform a financial analysis of the business using an income-based approach or a discounted cash flow (DCF) method, which can be useful for investors seeking to assess the return on their investments or the potential value of a company in the event of an acquisition.

However, valuation is also important for creditors and other stakeholders to understand the value of a business or asset. This information can be used to determine whether a company should receive additional funding or if an asset should be sold to secure debt.

While valuation can be a valuable tool, it is not without its flaws and should not be taken as an absolute measure of a company or asset’s value. Analysts often use subjective input or assumptions when developing a valuation model, and valuations can quickly be affected by corporate earnings or economic events.

This is especially true when it comes to valuation of intangibles, such as patents and trademarks, since these assets are sometimes subject to rapid changes in value. While there are a number of markets that exist for the resale of intangibles, these markets are not yet as well formalized and offer less certainty on realizable values.

IP can be a valuable source of capital for businesses, but many owners find it difficult to get access to the funds they need. Fortunately, there are several alternative structures that can be used to monetize these assets, including IP-backed loans, IP sale-leaseback, IP legal finance and IP royalty securitization.

Perfection of Security Interests

Perfection of security interests is a vital element of intellectual property financing. This process ensures that a creditor can more easily enforce its rights against the debtor when there is a default on payment.

There are various legal frameworks that apply to the perfecting of security interests in different types of intellectual property assets, including patents, trademarks, and copyrights. As a result, perfection of intellectual property security interests can be quite complex.

In general, federal law preempts state law when it comes to perfecting security interests over registered copyrights and pending copyright applications. However, there are exceptions to this rule. Generally, a secured party's security interest over patents and patent applications is governed by Article 9 of the UCC as long as the lender files a UCC-1 financing statement at the state level.

Similarly, the Lanham Act does not address perfecting security interests over federally registered trademarks, but most courts have held that filing a UCC-1 financing statement with the state of registration should be sufficient to achieve perfection. As a best practice, lenders should also record a short document with the United States Patent and Trademark Office ("PTO") that confirms their security interest in addition to filing their UCC-1 financing statements.

Another important issue in achieving perfection is the attachment of security interests to collateral. This is a step that is often overlooked by practitioners, but it is crucial for a lender to ensure its rights in intellectual property are protected and can be enforced against the debtor.

As a result, the UCC sets forth a number of rules regarding attachment of security interests to collateral. Those rules vary from state to state, but many of them provide for a temporary period during which a security interest is perfected by attaching collateral.

This temporary perfection is usually limited to 20 days from the date a secured party attaches the collateral. It is important to note that this temporary perfection cannot be extended if the secured party does not perfect the security interest by another method before the expiration of the 20-day period.

Licensing

Licensing involves the transfer of intellectual property rights from a company (the licensor) to another company (the licensee). The licensing agreement typically gives the licensee the right to use the licensor's technology or other IP for a fee, royalty or other consideration.

Licensors typically generate most of their revenue through licensing. This includes patents, trademarks and copyrights. In some cases, the licensor may also sell its licensed products to other companies. This practice is particularly common for companies that produce new or unique technologies and want to quickly market them overseas without the costs associated with setting up local offices and manufacturing locally.

As a result of globalization, international markets have become increasingly important. This has led to a growth in licensing of intellectual property. However, before embarking on a multinational campaign, licensors should take into account several issues, including cultural and legal differences that exist in different countries.

The licensee is responsible for ensuring that it follows the provisions of the license agreement. These provisions usually include a term for the license, territorial restrictions, exclusivity or non-exclusivity and other related terms.

Exclusiveness is a legal term that refers to the exclusivity of the licensee's rights to use the licensor's IP. It can be revocable or irrevocable. It can also indicate whether the licensee has the right to award sublicenses.

A license's territory is the geographical area that it covers. A license's territory can be restricted to a specific country or to a combination of countries, such as "North America" (Mexico/United States/Canada). This can help the licensee ensure that they do not have rights in a foreign country without permission from the licensor.

Some licenses are based on royalties, where the licensor receives an amount for each product that it sells under the license. This can be an attractive method of generating income. It also allows a company to expand its reach and gain access to new customers and markets.

Some companies have realized the benefits of using their intellectual property assets to secure debt financing from specialized banks, commercial lenders or private investors. This type of finance is a growing area and can be beneficial for companies that have a large portfolio of intellectual property but lack the available cash flow to cover their operating expenses.