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Intellectual Property-Insured Financing

Securing the value of an intellectual property asset when it is pledged as loan collateral.
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Savings

Offers mature-stage companies attractive, potentially more affordable financing options.

Protection

Provides extensive coverage of lenders’ exposures, allowing for competitive financing with potentially higher loan limits.

Competitive

Features interest rates typically lower than venture debt offerings.

To continue to expand and reach their full commercial potential, mature-stage companies require capital. But what if a promising company’s assets are largely intangible — for example, intellectual property (IP) and key contracts? The intangibility of these assets makes it difficult for the company to obtain financing without relinquishing equity.

IP-insured financing can secure the value of a company’s IP assets that are pledged as loan collateral. This policy solution wraps IP and other intangible assets with a layer of insurance protection to allow debt providers to lend to mature-stage technology companies — broadly defined as any companies that use technology in products or to create products — at a comparatively low cost of capital and without requiring equity. It enables lenders to more confidently finance mature-stage companies, which can potentially result in greater borrowing ability and improved terms.

Limited financing options for mature-stage companies

Mature-stage companies — whether backed by venture capital firms or not — often seek to borrow capital during or between equity rounds, but can face limited or expensive lending options. Traditional bank loans can be useful, but may be available in amounts borrowers view as insufficient and may require restrictive covenants. Typically, banks will focus only on a borrower’s tangible assets, with little willingness to consider the value of IP and other intangible assets in evaluating loan size and/or eligibility.

Venture capital can also provide a source of funding for mature-stage companies, but is typically offered in exchange for a portion of company ownership. Mature-stage companies can also attempt to secure financing via venture debt, but this may carry comparatively higher interest rates and require warrants.

Potential benefits 

IP-insured financing solutions can offer mature-stage companies an attractive, potentially more affordable option. IP-insured financing provides insurance to lenders on behalf of both venture- and non-venture-backed mature-stage companies, which can potentially result in greater borrowing ability and improved terms that are specifically tailored for these companies.

These policies protect lenders’ exposures, can provide coverage for the full amount of a credit facility, and can allow for competitive financing terms with potentially higher loan limits than what’s available in the traditional debt market. If the lender seeks to accelerate recoupment of its investment due to a borrower default, the policy is designed to pay off the loan in full.

Loans feature an interest-only period with amortization thereafter and interest rates that are typically lower than venture debt offerings, with no warrants.

Ideal company profile

Underwriters are generally willing to provide this solution to companies looking to borrow between $15 million and $50 million, so long as such companies have at least $5 million in annual gross revenue with positive to slightly negative cash flow, based on IP and/or intangible assets.

Underwriters evaluate borrowers’ IP — including patents, copyrights, trademarks, designs, and trade secrets — and additional intangible assets, such as commercial agreements and other valuable contracts.

Loans are generally available to US-based companies that use technology in products or to create products — typically with Series B funding or later. Pre-revenue companies, those that require FDA or other regulatory approval, and those without a significant US presence generally fall outside the appetite of underwriters.

Why work with an insurance specialist?

Marsh’s specialists can engage with insurance underwriters, to permit them to assess whether your company is likely to meet underwriting requirements and to advise and guide you through the process. The information generally required to complete such a review includes three years of financial returns and projections, capital structure tables, an investment presentation deck, and inventories of IP and other intangible assets.

If your company meets underwriters’ requirements and is attractive to prospective lenders, it may be able to secure a loan in as little as six weeks.

FAQs

Intellectual property, also known as IP, is a general term for the set of intangible assets owned and legally protected by a company from outside use or implementation without consent. Stemming from its ability to provide a firm with competitive advantages, defining IP as an asset aims to provide it the same protective rights as physical property. Obtaining such protective rights is critical as it prevents replication by potential competitors — a serious threat in a web-based environment or the mobile technology sector, for example.

If you own IP, you can realize value from it in several ways. You can use it internally for your own processes or as a means of providing goods and services to your customers. You also can share it externally through legal mechanisms such as royalty rights.

IP-insured financing can secure the value of an IP asset when that asset is pledged as collateral to obtain a loan.

By supporting an IP valuation with an insurance backstop, IP-insured financing products allow mature-stage companies to obtain debt financing at a lower cost of capital compared with venture debt or tech banks.

There are five types of IP insurance.

  • Defensive IP insurance: Protects an insured’s IP, products, and services from external attack and can backstop an insured’s outbound indemnity obligations.
  • Offensive IP insurance: Covers the costs of IP enforcement matters such as an insured filing suit against a third party asserting that the third party has infringed the insured’s IP.
  • Specific contingency insurance: Covers known risks and is appropriate for businesses seeking litigation buyout insurance or catastrophic loss protection for a known ongoing matter, including IP litigation.
  • Trade secret value insurance: Helps protect an insured from loss due to the misappropriation (theft) or unauthorized disclosure of its trade secrets.
  • IP-insured financing: Helps secure the value of an IP asset when that asset is pledged as collateral to obtain a loan.

Why Marsh

For mature-stage companies interested in IP-insured financing, Marsh is well-placed to assist. With in-house IP and business financing expertise, our dedicated brokerage team can guide your company through the process of obtaining IP-insured financing, often at no additional cost to you.

Our people

Paul Murray

Paul Murray

Senior Client Advisor, FINPRO

  • United States

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