Karl Barnfather explains how lenders’ lack of knowledge about IP value could hold back business growth.
Bank on your IP
A government-backed report released by the UK Intellectual Property Office (UKIPO) has concluded that banks are out of step in the way they value intellectual property (IP). Traditional lending criteria urgently needs updating to support innovation in the UK economy by ensuring that IP is recognised as a valuable business asset.
The report has highlighted that the vast majority of businesses still turn to banks when seeking finance, and yet this is often one of the most difficult routes. This is due to lenders having a ‘lack of familiarity’ with the business models of IP-rich companies.
SMEs applying for asset-based lending are likely to come up against a similar problem. Organisations providing this kind of finance are more likely to take note of intangible assets, such as patents, trade marks and registered design rights. As they are more used to lending against software, for example, they are more open to assets which are considered to be of higher risk. However, if given the choice of lending to one company or another, they would be likely to lend to those with tangible assets.
Traditional lenders have tightened their lending criteria, but there is now a risk that this approach could end up holding back growth. Their lack of understanding about the value of some IP assets could also put this group of lenders at a significant disadvantage as economic recovery gets underway.
Many lenders do not realise that it is possible to take out security against certain intellectual property assets, such as patents, trade marks and registered design rights. Such securities can be registered at the UKIPO in the same way that the IP itself was registered.
There is a significant knowledge gap among traditional lenders that needs to change now if we are going to give maximum support to SMEs.
As a source of equity-based finance, crowdfunding is a fairly new option, which has become increasingly open to business propositions of a high tech or scientific nature. The report cites examples where IP issues have been addressed as part of a decision to invest by funds such as Crowdcube and Seedrs.
The very nature of crowdfunding, which is an internet-based funding platform, means that there are more people to raise questions about the business proposition, which means IP issues are more likely to crop up. When comparing crowdfunding with some other, more traditional sources of finance, it may therefore be helping to spread IP awareness and understanding.
A report published by the European Patent Office (EPO) and the Office for Harmonisation in the Internal Market (OHIM) has recently confirmed for the first time the massive contribution that IP-led businesses make to the European economy - a total of 39 per cent of the European Union’s total economic activity (GDP), worth €4.7 trillion each year. This data confirms how important it is that those offering finance to SMEs are able to assess the value of IP assets.
Research among business leaders, noted in Chapter 5 of ‘Banking on IP’, reveals that most SMEs (93 per cent) have not tried to assess what their IP is worth. In addition, only six per cent of them valued their IP at more than ten per cent of their overall business’s worth and 84 per cent believed it to be worth nothing at all.
It’s not just lenders, businesses themselves have a very low awareness of the value of IP and this could limit their growth potential. Progress is being made, thanks to government support in real incentives like Patent Box, but more is needed. The reality for many businesses is that their intangible assets are likely to be worth four times as much as traditional tangible assets.
Karl Barnfather is chairman at patent and trade mark attorneys Withers & Rogers