Using Patents as Loan Collateral
Many technology and biotech companies have spent significant amounts of money protecting their inventions and discoveries by filing patents for their intellectual property. But how and when will a bank loan money using patents as collateral?
While most lenders will acknowledge the greatest asset a company may own is its intellectual property, it is very difficult to put a value on that property so it can be used as collateral for loans. Even when a company is generating substantial revenues from the patents and its brand is very well known, there is no universal formula to put a value on intellectual property.
During my 15-year banking career, I have seen money loaned against patents two times only. In both cases, the companies borrowing were manufacturing products and generating good revenues based on the one or more patents. In both cases, they were generating break even profits. In both cases, there was not a significant abundance of other collateral for the bank to consider. In both cases, the personal guarantors had very good credit.
In the first case, the company had five patents related to the manufacture and design of a household product. The original cost to obtain these five patents was about $125,000. Several years after the company began producing and selling large quantities of products based on their patents, it became necessary to file a patent infringement lawsuit against a very large well-known U.S. company who had simply started manufacturing an identical product as my loan customer. Although it was a typical David vs. Goliath case -- my customer had very little cash to litigate and the company infringing on the patent had tens of millions of dollars to fight -- my customer won.
The case ended when a federal judge ruled that my customer’s patent had been infringed on. Both parties elected to reach a monetary settlement without the court’s intervention. The case was settled in favor of my customer in a manner whereby the large company was able to continue to manufacture the product. The large company agreed to pay royalty on all sales of product it manufactured that violated the patent. The large company paid some but not all of the legal expenses related to the suit. My customer spent a net of about $80,000 defending the patent. The bank I worked for hired a patent attorney who wrote an opinion stating the patents together were worth what was spent representing the cost of the litigation plus the original $125,000 spent writing and filing the original patents. This was the value the customer had indicated on its balance sheet for the patents. The opinion letter stated that it would have been impossible to place a value on the patents had they not been challenged in federal court. Although these five patents represent the basis of manufacturing many millions of dollars in products every year, the amount the bank was willing to lend against the patents was somewhat less than the $205,000 the company and bank’s patent attorney valued the intangible asset for.
The second case was much simpler. The company’s patents were written around the design and features of a safety device worn by many motorcyclists. The company had a very good product which was being endorsed by numerous celebrities. Sales were going through the roof. Since the company used contract manufacturers for making all of its products, there was no hard collateral to pledge against a loan. Because of the highly unique nature of the patents and the high market demand for the products being sold, the bank was willing to accept a blanket lien against all tangible and intangible assets including patents. It made a loan to the borrower that was much larger than the value of the A/R which was being generated from the original patents. The bank did not assign a value to the patents per se, but took them in an “abundance of caution.”
In both cases, the bank had to hire a patent attorney to have the patents properly assigned in the U.S. Patent and Trademark office. This process took about four weeks to complete because of the searches that were necessary and the unusual type of collateral for the bank.
Happily, both companies are thriving today and have progressed past the point of needing to use patents as their primary collateral for bank loans.
It is not likely that a pre-revenue company will be able to obtain a loan against patents, but it is possible for a company generating strong revenues to leverage their patents to eke a little more cash out of a loan request. The real question a patent owner must ask is this: Is the “true” value of the patents worth pledging against a loan when they may see only a small value assigned to the patents compared to what the patents could generate in revenues?
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: sam@lesliethacker.com
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