Patents were first used as collateral to secure financing by Thomas Edison in the late 1880s. Edison used his patent for the incandescent electric light bulb as collateral to secure financing to start his company, the General Electric Company. Since Edison’s use of his patents as collateral, intellectual property has been used as collateral in the United States. Although the use of intellectual property as collateral did not gain popularity in the late 1800s with Edison’s use, it has become quite popular in recent years.
A patent is a right granted to the owner of an invention that prevents others, without the owner’s permission, from making, using, importing or selling the invention. A patentable invention includes a product or a process that gives a new technical solution to a problem, or a new method of doing things, the composition of a new product, or a technical improvement on how certain objects work. A patent has a term of 20 years from the date of filing, subject to the payment of annual renewal fees. One main thing to think about when using patents as collateral is the fact that patent protection is territorial. If filed and granted in Singapore, a patent is only enforceable within Singapore and therefore, the protection is only afforded to a patent owner within Singapore.
On April 8, 2014, Singapore announced details of a new financing scheme aimed at helping local businesses secure bank loans by using their patents as collateral. The Intellectual Property Office of Singapore (IPOS) is the agency that implements this scheme and hopes that this will spark the interest of local companies.
Companies interested in availing themselves of the scheme must be local enterprises incorporated in Singapore and use a granted patent as collateral. As part of the approval process, their patent will be valued by a member of an IPOS-appointed panel, which includes valuation companies, i.e. American Appraisal Singapore, Consor Intellectual Asset Management and Deloitte & Touche Financial Advisory Services. The panel will determine the worth of the patent to help banks decide on how much to lend. Three local banks – DBS, OCBC and UOB – are currently participating in the scheme.
This two-year plan by IPOS will involve the Singapore government sharing the default risk with participating banks. The banks will start accepting loan applications under this scheme from late second quarter of this year until April 2016. Interest ranging from 3.5% to 7.5% will be charged for loans of between one and six years. This rate is lower than the interest charged to smaller companies seeking unsecured loans, which is 8% to 10%.
IPOS chief executive Tan Yih San, during the scheme’s launch, said: “What we are (doing) is to work with the banks to recognise intangible assets, which is not quite something that is readily available in the loan market today.” He added that the scheme will open opportunities for companies to grow and expand not just locally, but overseas as well.
During the same event, Indranee Rajah, Senior Minister of State (Law and Education), said: “There is a growing trend of businesses being valued based on intangible assets. According to a report by Brand Finance, 42% of enterprise value in Singapore was in intangible assets in 2012, up from 35% in 2011. With IPOS’ new IP Financing Scheme, businesses can monetize their IP assets,” she added.
There are several advantages of using intellectual property as collateral.
One advantage is that intellectual property can be more secure than other forms of collateral. Most investors only invest in intellectual property that is receiving licensing royalties. The royalty payments are the ultimate source of cash that repay the loan. Hence, there is a consistent source of cash flow to repay the loan through licensing and, therefore, lower the risk of default. Another advantage is the increased return the owner of the intellectual property earns. Using intellectual property as collateral increases the owner’s return through increased leveraging. Many royalty streams are collected in one lump sum rather than over time, and this lump sum can then be invested in future or current projects that have a higher return than the cost of financing.
On the other hand, risk is the main disadvantage in using intellectual property as collateral. However, this can be minimized through proper loan structure.
As Singapore is increasingly becoming a technology-driven, knowledge-based economy, the use of intellectual property as collateral will become popular moving forward