Traditional fixed assets may no longer do the funding job – especially for fast-expanding technology firms. The UK knowledge economy increasingly hums along on intellectual property (IP), which is often software-based. Frustratingly, IP software is rarely liquid, often tricky to measure and still poorly served by UK lenders, tending not to treat it as its own, very distinct asset class. So a new way of releasing cash from IP has to be worth a look at.
Previously such funding was, in the main, limited to vendor finance and loans. But the introduction of a Software Licence Solution (SLS) by Lombard Technology Services offers a new, relatively under-researched route, that isn’t tied to a single brand of software. Many businesses, of course, have well-documented difficulties in accessing significant pools of capital. But products such as Lombard’s suggest that their availability is part of the ‘new normal’, where traditional forms of finance are increasingly replaced by others. Especially in IP.
John Drake, director of finance at Lombard Technology Services (part of The Royal Bank of Scotland), says that there’s considerable demand from customers in this market – whether they’ve developed their own software or are operating expensive software licences. “This new product provides customers with an effective solution to free up capital, without impacting on the operation of their software licences.”
It’s especially useful for companies eager to capitalise on new market opportunities while retaining use of their software research. Stories of high quality IP being lost due to lack of cash, funding opportunities or poor quality management are legion. In good times, IP is often overlooked. And in more stressed times, IP assets often aren’t recognised, sometimes because they have become part of the furniture. Crucially, IP financing doesn’t necessarily occupy the technology or information space. The core benefit of Software Licence Solution, says Drake, is that the customer can release capital tied up in licence fees or hefty development costs, paying to use the product for any period of time needed – like that of a mobile phone contract. That means the cost of ownership is more evenly distributed, with the opportunity of new credit lines.
In today’s technologically advanced world innovative funding solutions are required to meet our customers’ business needs
Ted Bechman is a strategic finance director specialising in the SME technology sector. His view is that Lombard has, quite simply, created a viable product that uses well established principles of sale and leaseback – and an intelligent approach to valuing IP as the basis for lending. “Companies have always understood that IP has value, the issue being how to quantify it. Lombard has looked at a mixture of revenues, R&D tax credit expenditure and market assessment to attribute a value, which in turn can be used as financial collateral. Scalability of a product is crucial,” he says. “The software created is much more valuable to the business than the money spent on developing it. The product recognises this and helps SMEs to unlock potential value – hence the need – for innovative IP funding solutions.”
The funding solution provided by Lombard Technology Solutions has played a significant role in providing the financial heft required by one company’s crucial growth phase recently – and its solution is now an integral part of all its future products, including two blockbuster games scheduled for release over the next 12 months. So, credit lines are being used and used well.
But many well-known – and highly creative – UK companies remain unaware how much their business is reliant on technology IP. IP rights are often an excellent fit for patents, trademarks and registered designs. Much of it is unregistered and not valued accurately. That’s a funding opportunity for UK SMEs – which account for 99% of the 4.8 million businesses currently in existence.
Bear in mind that IP is popularly thought of being present in mobile, ‘smart’ technology (witness the ongoing patent bickering between Apple and Samsung). But it’s also highly prevalent in a huge range of other areas, from architecture to heavy industrial engineering, not just in consumer-friendly technology products. In 2012, the Breedon Report reckoned the scale of the prospective funding gap for the coming five years was somewhere between £84bn and £191bn in terms of IP and business intangible assets. Some supporting rhetoric has emerged from Government.
Business Secretary Vince Cable has said IP is “too important an asset to be undervalued by banks, as the main source of finance”. But substantive changes and new products are still taking their time to emerge. Millions of pounds worth of UK business assets remain poorly leveraged.
So far, Lombard’s product has seen deals with companies ranging from a pharma logistical operation to a company that monitors virtual networks. The spread and scope of the product bodes well for the future. “We’ve had fantastic feedback,” says Keith Nowland, regional sales director from Lombard Technology Services. “It’s not about using this product within just the technology sector, it’s about the use of technology within any sector. The diversity of customers so far suggests there’s a very big market – an innovative way to raise capital. Fundamentally, it’s another way for a business to raise cash, freeing up capital without it being tied up in the development of IP. It’s not drawn from debt, crucially, so it’s an asset finance product rather than a debt product.”
Many companies look set to benefit, particularly SMEs and mid-sized corporates. Still, some preconceptions hang around. Who would wish to sell what is likely to be one of their biggest company assets? “As an asset finance provider, we’re here to help our customers benefit from the funding solutions that we have available to them,” says Nowland. “As a business, we are only successful if our customers are successful, that’s why we are here to help them – ultimately their success lies in the future value of the intellectual property rights (IPR). Asset finance is a great mechanism to release funds against the asset, which in this instance is the IP. A deal is structured in a way that the commercial use of software is retained and controlled by the customer.”
Bear in mind that no restriction on Lombard Technology Services rights can be incorporated in a contract as the transaction is a sale.
Senior lecturer in IP and EU law at City University, Enrico Bonadio, says the Lombard arrangement looks a novel, interesting one. “It’s a new contractual practice, certainly. There are contracts that licence back between the developer of software and the user. But these contract schemes are about creating value.”
He goes on: “They seem to identify a need and I think there is a need. As long as it’s the right tool for the right job, of course. Care should always be taken to protect copyright in EU and UK law.”
IP consultant Michael Ellis agrees that new funding entrants to the market should be welcomed. “It’s much easier to do if the IP has already been licenced and you can see the revenue, the income and what the market, or potential market, is,” he says. “The more robust the patents are, the lower the risk factor. In terms of the concept, it is really quite clear.” Ellis believes that such instruments should be viewed like any other financial vehicle.
But a key part of the puzzle is getting the message out to business owners. As a report by the UK Intellectual Property Office has noted “the relatively low level of financial skills in many SMEs means that few look beyond their bank to asset-based lending options, mezzanine finance or equity finance opportunities such as crowd funding or more traditional venture capital.”
Addressing the need
The IT market offers rich growth opportunities when it comes to funding software, especially in the services sector. It’s currently estimated that software already accounts for 20% of IT market revenues. As to the nuts and bolts of the arrangement, at the expiry of the licence term, Lombard can limit its interest in any share of the sale proceeds to a nominal amount or the customer can continue to use the software for a reduced annual licence fee.
Lombard Technology Services will finance upgrades up to the amount of the customer’s credit limit. If there is no credit capacity Lombard Technology Services will allow the customer to self-finance any upgrades – or the customer may ask Lombard Technology Services to sell the IPR to an alternative financier. “In today’s technologically advanced world innovative funding solutions are required to meet customers’ business needs,” says Drake. “We believe that, through our continued commitment to helping customers achieve their aspirations, finance solutions such as Software Licence Solution, will be a valuable addition to our portfolio of IT funding products.”
Lombard Technology Services is part of Lombard, the UK’s leading asset finance specialists, with a track record dating back over 150 years. Security may be required and product fees may apply.