Importance of Proper Valuation of Intellectual Property for Obtaining Finance

While securitization appears to be gaining ground, conventional lending remains the main source of external finance for most SMEs. The practice of extending loans secured solely by IP assets is not very common; in fact, it is practised more by venture capitalists than by banks. If you seek to use IP assets as collateral to obtain financing, your IP assets stand a greater chance of being accepted as collateral if you are able to prove their liquidity and that they can be valued separately from your business. Furthermore, you have to show that your IP assets are durable, at least for the period during which you have to repay the loan, and marketable in the event of foreclosure or bankruptcy.

In this respect, it is critical to identify all the IP assets of your SME and to obtain an objective valuation of the identified assets from a competent valuation firm. The value of IP management processes which identify, log, track and quantify your IP assets becomes increasingly important in the Internet economy. This is one more reason for you to increase in-house awareness of the extent and value of IP asset holdings, including trade secrets, which might be used to collateralize a loan.

It is true that until now the valuation of intellectual property is considered to be highly subjective by both lenders and borrowers. While well-founded valuation methodologies exist, they are either considered to be too subjective or are not generally understood by most people. However, the increasing use of royalty streams arising from licensing to determine the value of intellectual property is a welcome development in enhancing the acceptability of intellectual property assets as valuable assets providing security for debt financing and equity participation.

As an SME, it is therefore important to keep this aspect in mind while seeking financial assistance in particular, and while developing your business strategy and business plan in general.