Intellectual property finance

IP finance is lending secured on a company’s intellectual property, such as patents, software, trade marks and brands, or on the income that property earns. The lender values the IP, discounts the value heavily because IP is hard to sell, and lends against what is left alongside the company’s cash flow. It suits companies whose value sits in revenue-earning IP, with few physical assets to offer.

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How lending against intellectual property works

A lender takes security over intellectual property in the same way it takes security over a machine: a fixed charge over the specific rights, registered at Companies House, usually backed by a debenture over the rest of the company’s assets. While the loan is outstanding, the company cannot sell the rights or grant an exclusive licence without the lender’s consent.

The lender is lending against the income the IP produces: licence fees, software subscriptions, sales of a patented product, royalties on a brand. The Intellectual Property Office’s guidance says IP that does not support cash flow may have no financial value, and a lender takes the same view. A granted patent on a product that has not yet sold gives the lender little to value, because there is no income to measure and no record of what customers will pay for it. The lender also looks at how long the protection has left to run, since a patent near the end of its term earns for fewer years.

IP is harder to sell than a building. A buyer for a patent or a software platform has to be found, the rights may be worth much less outside the business that built them, and their value falls if the technology is overtaken. A British Business Bank study in 2018 found that lenders apply a significant discount to IP valuations because of that uncertainty, and named valuation, legal enforceability and the difficulty of selling IP among the barriers to lending against it.

Intellectual property lenders look at

Patents

Granted patents on a product or process the company sells or licenses, with renewal fees paid and protection in the markets where the income is earned.

Software

Code the company owns outright, earning subscription or licence income. Ownership has to be clear, including assignments from founders and contractors who wrote it.

Trade marks and brands

Registered marks attached to products with an established sales record, or licensed to others for a royalty.

Licences and royalty streams

Contracted income from others using the company’s IP, which a lender can value from the contracts themselves.

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Who IP finance suits

A company whose value sits in its intellectual property, with revenue that the IP produces and little property, vehicles or stock to offer as security. Software businesses with recurring subscription income, engineering and life-science companies with granted patents that are licensed or sold, and consumer brands with registered trade marks and royalty income fit that description.

It suits a company that wants growth money without selling shares. Borrowing keeps ownership with the founders and existing investors, in exchange for repayments the business must meet from its income. A company that does not yet earn revenue from its IP is better matched to equity, through angel investment or venture capital, or to Innovate UK grants.

Software companies with predictable subscription income can also borrow against that income through recurring revenue finance, where the lender looks at contracted revenue more than at the code. Companies with a research and development tax relief claim can borrow against the claim with R&D tax credit loans.

How intellectual property is valued

Cost method
What it cost to develop the IP, or would cost to recreate. It ignores what the IP earns, so lenders give it little weight.
Market method
What comparable IP has sold or been licensed for. Deal terms are confidential, so good comparisons are hard to find.
Income method
The future income the IP will generate, less the costs of earning it, discounted to a present value. Lenders rely on this one most.
The lender’s discount
The lender cuts the valuation to allow for the cost and uncertainty of selling the IP if the company fails, and lends against the reduced figure.

The Intellectual Property Office describes the three methods in its guidance on valuing intellectual property. A lender will ask for a valuation from an independent valuer it accepts.

Borrowing against a software platform

Illustrative example

A software company’s platform and trade marks are valued at £1.5m using the income method. The lender applies an assumed discount of 60% and lends £400,000 over five years at an assumed 12% a year.

Independent valuation
£1,500,000
Lender’s assumed 60% discount
£900,000
Value the lender lends against
£600,000
Loan
£400,000
Monthly repayment
£8,897.78
Annual repayment
£106,773.35
Total interest over five years
£133,866.74

The lender also checks that the company’s subscription income covers £106,773.35 a year with room to spare, using the debt service cover test it applies to any loan.

Ownership checks and cost

Ownership comes first. The IP must belong to the company, not to a founder personally or to the developer who wrote the code. Lenders check the registrations, the assignments from everyone who created the IP, any licences granted to others, and any dispute or claim of infringement. Gaps in the paperwork are cheaper to fix before you apply than during the lender’s due diligence.

Pricing sits above lending secured on property or equipment, because the security is harder to value and to sell. Add the independent valuation, the lender’s legal costs and any arrangement fee. The loan agreement will restrict what you can do with the IP while the loan is outstanding, and the lender may ask the directors for personal guarantees as well.

If the company defaults, the lender can enforce its charge and sell the IP, which takes away the asset the business was built on. Model the repayments against a fall in income before you borrow, and read the default and covenant clauses with a solicitor.

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Questions people ask

Can I get a business loan secured on a patent?

Yes, from lenders that accept intellectual property as security, if the patent is granted, owned by the company and earning income through sales or licences. The lender values the patent, discounts the value to allow for the difficulty of selling it, and lends against what remains alongside the company’s cash flow. A patent that earns nothing yet is hard to borrow against.

How is intellectual property valued for a loan?

An independent valuer uses the cost, market or income method. Lenders rely most on the income method, which values the future income the IP will generate, less the costs of earning it, as a present value. The lender then applies its own discount to that figure, because IP is uncertain in value and harder to sell than property or equipment.

What happens to my intellectual property if the company cannot repay?

The lender can enforce its charge and sell the IP, or appoint an administrator who sells the business with it. The company loses the rights, and with them the income they earned. Any shortfall after the sale is still owed by the company and by anyone who gave a personal guarantee.

Is IP finance available to start-ups?

It is hard to obtain before the IP earns income, because the lender has no cash flow to lend against and no track record of the IP’s value. Early-stage companies with valuable IP but no revenue are better matched to equity investment or grants. Once the IP produces steady income, lending against it becomes possible.

Does intellectual property have to be registered to borrow against it?

Registered rights, such as granted patents and registered trade marks, are easier to charge and to value. Copyright in software arises without registration, so the lender looks at the documents proving the company owns it: employment contracts, contractor assignments and records of who wrote the code.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Business loans

Recurring revenue finance

Lending against subscription or contract income, for software and subscription businesses.

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R&D tax credit loans

A loan against the R&D tax relief your company expects to receive, repaid when the claim is paid.

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Secured business loans

Borrowing backed by a charge over property, equipment or the whole company, and what the lender can do if it goes wrong.

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Venture capital

Venture funds buy stakes in companies that could grow very large.

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

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