Intangible Asset Finance Explained

Intangible asset finance is a type of financing that focuses on the value of intangible assets, such as patents, copyrights, and trademarks.

These assets are often overlooked, but they can be a significant source of value for businesses.

Intangible assets can account for up to 90% of a company's market value, making them a crucial aspect of a business's financial landscape.

Companies can use intangible asset finance to unlock the value of these assets and use them as collateral for loans or investments.

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Intangible assets can represent a significant portion of a company's value, in some cases even outpacing tangible assets.

Intellectual property rights can be used to secure financing by pledging them or transferring rights to cash flows derived from these assets.

For some businesses, intangible assets only represent a small portion of what a company is worth, but for others, the bulk of their value may flow from their intellectual property.

Companies that rely heavily on intangible assets must communicate the value of these assets to lenders and investors.

IP Financing is a growing but still largely nascent field, with ongoing experiments by commercial actors and governments to improve access to finance on the strength of intellectual property.

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Measuring and reporting intangible assets is a complex task, but it's crucial for making informed decisions in the modern economy. The "non-physical" nature of intangible assets makes them hard to measure and report.

Several international projects have worked together to establish a harmonized database of intangible capital at the business sector level, known as INTAN-Invest. This database proposes harmonized cross-country data on intangible investment by industry, covering 15 EU countries and the United States from 1995 on.

The share of total investment of intangibles as defined by the INTAN-Invest database increased by 29 percent between 1995 and 2020, according to McKinsey. This highlights the growing importance of intangible assets in the economy.

A new database, Global INTAN-Invest, has been launched in 2024 to expand on INTAN-Invest and provide cross-country quarterly and annual measures of intangible assets for high-income and emerging economies.

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Measuring investments in intangible assets can be a challenge due to their non-physical nature. The existing data suffers from gaps in coverage and time lags, especially outside high-income economies.

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Measuring intangible investments can have several benefits, including providing up-to-date statistics on investment in intangible assets, especially in emerging economies, which can inform pro-growth national policies. This data can also help researchers and entrepreneurs understand the links between intangible assets and economic performance.

A harmonized database of intangible capital, INTAN-Invest, was established by multiple international projects, proposing harmonized cross-country data on intangible investment by industry covering 15 EU countries and the United States from 1995 on. The share of total investment of intangibles increased by 29 percent between 1995 and 2020, as reported by McKinsey.

The INTAN-Invest database provides a valuable resource for measuring intangible investments, but it has limitations, such as not covering all types of intangible assets and not including data from low-income economies.

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Investors want to see more recognition of intangible assets in financial statements, but they're also concerned about potential abuse. This is why improved disclosures and disaggregation are essential before recognition can occur.

Intangible assets are fundamental to the modern economy, yet they're largely omitted from financial statements. Our survey of CFA Institute members reveals that investors desire greater transparency through disclosures.

Investors are wary of the potential for abuse, and that's a valid concern. To address this, greater transparency through disclosures is necessary.

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Challenges in intangible asset finance are real and can make it difficult to scale. Valuing intangibles is hard due to discrepancies between accounting values and market values, limited disclosure, and the lack of a common valuation framework.

Lack of familiarity with intellectual property as an asset class among lenders is another significant challenge. Identifying the relevant intangibles, performing due diligence, and setting up contracts takes time and effort.

Regulators don't encourage the use of intangibles as collateral, which adds to the complexity. High transaction costs, complex valuation, and due diligence processes also contribute to the challenges.

To overcome these challenges, it's essential to have an IP strategy that leverages, protects, and manages your company's intangible assets. This can be achieved by filing necessary patents, trademarks, and copyrights.

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A third-party valuation of your intellectual property portfolio can also be beneficial, especially if significant investment has been made. This can give your lender a sense of the value of your intangibles.

Here are some common challenges in intangible asset finance, summarized:

Valuing intangible assets is a hard task, often resulting in discrepancies between accounting values and market values. This makes it difficult for lenders to accurately assess the worth of these assets.

Limited disclosure and a lack of a common valuation framework also hinder the process. I've seen this firsthand in my experience working with companies that struggle to provide transparent and consistent financial data.

The lack of familiarity with intellectual property as an asset class among lenders is another significant obstacle. Identifying the relevant intangibles, performing due diligence, and setting up contracts to establish rights takes time and expertise.

Regulators do not encourage the use of intangibles as collateral, which further complicates the process. This lack of support from regulatory bodies can be discouraging for companies looking to leverage their intangible assets.

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High transaction costs are another challenge, driven by the complexities associated with valuation, due diligence, and administrative efforts. These costs can be significant, making it difficult for companies to justify the expense.

Lack of confidence in IP valuation methodologies is a major concern, making it harder for lenders to feel confident in their investment. This lack of confidence can lead to lower payouts in the event of default.

Here are some of the challenges in intangible asset finance at a glance:

Having a solid strategy in place is crucial to protecting and managing your company's intangible assets. This includes filing patents, trademarks, and copyrights to safeguard your intellectual property.

You can "be rich" with intangibles, and a third-party valuation of your intellectual property portfolio can give your lender a sense of their value. This is especially important if significant investment has been made in intangibles.

To monetize your intangibles, consider brokering, selling patents, or licensing agreements that provide revenue streams. This can be a valuable way to leverage your IP and generate income.

Here are some key financial indicators to monitor when managing intangibles:

Intangible asset finance can be a cost-effective way to fund the assets your business needs, offering a secured way to borrow money.

Fewer lenders are able to help with intangible assets compared to tangible assets, but those who do work in the field may be able to consider funding options.

A detailed valuation report is required to determine an accurate valuation of an intangible asset, which can be a challenge due to the difficulty in selling such assets.

Independent experts in areas such as marketing or patent law may be needed to prepare this report.

At Rangewell, we can work with you to provide this report and an assessment of the value of the asset to you and your business.

We also know lenders who may be able to offer funding using intangible assets as collateral, such as brand names.

We can help you understand the requirements and lending criteria set by these lenders and support you in making a successful application.

Rangewell can help you find the lenders who work in the field of intangible asset finance and prepare an application for funding.

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The World Intellectual Property Organization (WIPO) is a self-funding agency of the United Nations, with 193 member states, aiming to develop a balanced and effective international IP system.

In June 2021, WIPO released its Medium Term Strategic Plan (MTSP), which included working with its partners to catalyze international discussions on the important questions of intellectual property valuation and finance.

WIPO is launching a new report series, studying country experiences with IP-backed financing, which includes China, Jamaica, Japan, Singapour, Switzerland, and the United Kingdom.

The United Nations Commission on International Trade Law (UNCITRAL) promotes the use and adoption of legislative and non-legislative instruments in areas of commercial law.

UNCITRAL's Legislative Guide on Secured Transactions aims to enhance the availability of secured credit, making credit more available and at a lower cost for Intellectual property rights owners.

The Organisation for Economic Co-operation and Development (OECD) explores the role of intellectual property rights and studies the economic impact of IP regimes globally.

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The OECD produced a paper in 2019 on the use of intangibles to strengthen SME access to finance.

The International Financial Reporting Standards Foundation (IFRS) promotes the development of financial reporting standards, including the criteria for recognizing and measuring intangible assets.

An intangible asset is defined as an identifiable non-monetary asset without physical substance, such as contractual or other legal rights.

In recent years, there have been several notable events that have shaped the landscape of intangible asset finance.

In 2022, a High-level Conversation on Unlocking Intangible Asset Finance took place, bringing together experts to discuss the potential of intangible assets in finance.

Previous events have laid the groundwork for the current state of intangible asset finance.

The Expert Consultative Group on the Valuation of Intangible Assets was formed in 2023, providing a platform for experts to share their knowledge and best practices in valuing intangible assets.

A notable event in 2023 was the IP Finance Dialogue: Expanding Horizons on IP Finance and Valuation, which aimed to expand the understanding of IP finance and valuation.

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The Hands-on IP Finance: Securing Loans with Your IP Assets event in 2024 focused on providing practical advice on how to secure loans using IP assets.

Here are the notable events mentioned above:

We've got experts on our side at Rangewell who can guide you through the process of securing intangible asset finance.

Rangewell is a business finance expert that specializes in helping businesses find the right lenders for their needs, including intangible asset funding.

Talk to Rangewell and we'll work with you to prepare an application for funding, making the process as smooth as possible.

At Rangewell, we'll help you understand the lending criteria set by lenders who work in this field, so you know exactly what to expect.

We'll support you every step of the way to ensure your application is a success, and we'll work with you to find the lenders who are best suited to your business needs.

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