Where available, affordable credit is the easiest means for an SME to smooth out cash flow issues. Of course, the availability and affordability of credit is heavily dependent upon the security which a borrower can offer to the lender to mitigate the risk of any loan remaining unpaid.
One class of assets, which can be used to secure credit and which both SMEs and larger companies often overlook, is intellectual property rights. However, nearly every UK industry either produces or exploits IP rights to some extent.
IP rights are intangible property rights which are often the most valuable assets a company will own.
The IP rights which are most commonly used as security are:
A long lasting unregistered right which protects creative works such as books, film and music.
Often referred to as brands, registered trade marks allow the owner to prevent others from using the same or similar brand in relation to the specified goods or services and, if managed correctly, can last forever; and
A 20 year long monopoly to exploit a new invention in exchange for making the details of the invention public.
IP rights can be used as security both on their own or together with other assets owned by the borrower. In the film industry, for example, finance will often be raised for the next project by borrowing against the future copyright royalties it is hoped the film will generate, whereas it is possible for SMEs to grant the lender rights (called “charges”) over all of their assets, including their IP, as security for a loan.
You should be prepared that taking security over IP rights does present different challenges to other security assets such as land or tangible assets.
1. IP rights are intangible
There is nothing which the lender can take possession of or physically label as its own to prevent third parties from acquiring the asset without its knowledge, and therefore the lender may wish to exert significant control over the IP even though you will probably need to exploit the IP to continue running your business.
2. IP rights can be difficult to value and this value can change suddenly and dramatically
The most extreme example of this is where a third party successfully convinces the court that your IP right should never have been granted in the first place and it, and any value associated with it, falls away completely.
3. The lender may be reluctant to accept certain IP rights as security
This will be probable if it will be difficult to sell the rights or exploit them if a default occurs under the loan agreement.
Nevertheless, it is certainly worth investigating whether you own any IP which have accrued value – such as a brand attracting significant goodwill – or which generate dependable royalty streams – such as a licensed patent. If it turns out you are sitting on unexploited value in your IP assets, firstly make sure that you are protecting that value effectively. For example, registering and enforcing trade marks or ensuring that your company owns any copyright generated on its behalf and then see if you can leverage finance on the basis of that value. You may discover that your IP allows you to access previously unavailable or unaffordable credit and take future cashflow issues in your stride.
Alexandra Pygall is an Intellectual Property Partner at Stephenson Harwood and Mark Kramer is an associate in the Intellectual Property practice.
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