Patent-backed lending: 5 things you should consider if you want to use your patents for financing

Many young, innovative small and medium-sized enterprises (SMEs) face significant challenges in accessing the capital market, especially when it comes to debt financing. They often lack the necessary collateral to obtain loans, or have too short a balance sheet history and insufficient fundamentals to gain the trust of traditional lenders. In this environment, many companies are looking for alternative financing options where patents and other intangible assets can be used as collateral: Patent-backed lending. This article highlights five important issues that companies should consider when looking to use their patents for financing.

1. Determining the value of the patent:

The value of your patent is critical to its use as collateral. Get a professional valuation to realistically assess the market value (not income value!) and potential of your patent.

• Tip: You should definitely make sure that a market value plus a liquidation value are calculated, both values are of interest for a bank. When it comes to securing patents, a capitalized earnings value is not useful, at best as a supplement. Use specialized valuation companies that have experience in the valuation of intellectual property, ideally for financing purposes. Ask for references in this area.

2. Clarity about rights and utilisation:

Make sure that you own the full rights to your patent and that there are no ongoing disputes or legal claims by third parties. Existing licence agreements and their conditions, such as terminability or exclusive rights, can also play an important role

• Tip: Review all legal documents and make sure that your legal situation is clear and that legal obligations such as required licenses, third-party intellectual property rights or granted licenses and their terms are clearly communicated.

3. Maintenance and term of patents:

It is important to note that patents have a limited term and that maintaining them incurs fees. It is therefore essential to consider the remaining term of your patents and to ensure that sufficient capital is available to pay all fees.

• Tip: Plan how your invention can continue to provide value after the initial term expires, and research possible patent extensions or follow-on rights.

4. Find the right lenders for your needs.

When looking for suitable sources of financing that accept patents as collateral, it is important to distinguish between equity and debt financing. Many companies prefer debt financing to retain control of their business rather than selling shares to venture capitalists, for example. In this case, patent-secured debt financing is an interesting option.

• Tips for finding the right financing institutions for your needs:

A Specifically, research banks or financial institutions that specialise in technology or IP-based financing. These institutions have more experience in dealing with intangible assets such as patents and are more willing to accept them as collateral.

Examples include:

• Silicon Valley Bank is the go-to for financing technology companies and start-ups, which often have significant patents and other IP. They offer specialised loans using intellectual property as collateral and have many years of experience in valuing intangible assets.

• Deutsche Bank uses patents as collateral for loans, as mentioned in the previous example, which shows that even traditional banks are willing to lend on patents under certain circumstances.

• BDC Business Development Bank Canada. There, for example, InTraCoM carries out all necessary patent valuations.

B Innovation and technology funding programmes: Many countries offer special programmes and funds that support the financing of technology-driven companies. These programmes often work with banks to develop innovative financing solutions based on patents.

Examples:

• InnovFin from the European Investment Bank (EIB) offers specialised financing products for innovative companies, including those wishing to use their patents as collateral. This programme aims to close the financing gap for innovative companies that have difficulty obtaining traditional credit lines.

• KfW Bankengruppe in Germany offers loans for innovation projects where patents and other IP can also be considered as part of the collateral.

• In all cases, you should already have a patent valuation report prepared, as this will ensure you are fully prepared for financing discussions. The experts at InTraCoM will assist you with this.

5. Combination with other intellectual property rights (e.g. trademarks):

In addition to patents, trademarks and other intellectual property rights can also be used as collateral. This increases the attractiveness of your financing project and diversifies your collateral base. However, it is important to bear in mind that not all IP financiers also lend against trademarks. In the case of patents, the financier can stop the use of the patent and thus production in the event of a payment default, which creates a lot of pressure on the borrower. However, with brands, the company could simply sell the same products under a new brand, which would render the collateral less effective. Patents are undoubtedly the stronger collateral than brands.

• Tip: Use the synergy of patents and brands to strengthen the confidence of financing partners. Brands can be established and monetised faster than patents, making them an invaluable addition.

Conculsion: For SMEs that have difficulties accessing traditional debt capital, patents can be a valuable alternative as collateral. However, the success of such financing depends on various factors. A careful evaluation of the patent value, clear legal circumstances and the selection of suitable financing partners are of great importance. If you also include other intellectual property rights such as trademarks in your considerations, you can further increase your chances of successful financing and diversify your collateral base.