In early January 2024, Natwest Bank launched a new scheme to allow intellectual property (IP) to be used as collateral. The scheme is directed at ‘high growth businesses’ which even Natwest identifies as those that own few tangible assets, but in the words of the Natwest press department ‘can be rich in IP and intangible assets’.

Whilst such a move is a positive one in terms of recognizing potential value that may reside in intellectual property, there are serious issues to be considered on both sides of the lending scheme, especially from the position of a smaller, pure start-up business who may be encouraged by the Natwest move, but should not be dazzled by the announcement and lose sight of the challenges in leveraging the value of IP.

We shall leave aside larger, established businesses with proven track records of innovation and leveraging that innovation into a financial return and focus for a moment on the smaller end of town, those which are likely in a position to have or have had difficulties in obtaining financial aid.

Let us agree at the outset, that some IP is or at least can be valuable and that often the single biggest limiter on the ability of a ‘high growth business’ to grow is access to funds, however, it is very difficult to identify a piece of IP as valuable or potentially valuable, especially at an early stage, which is when a ‘high growth business’ is most in need of funds.

As Jessica Brown identifies in her article analysing the Natwest move, ‘One of the major challenges in IP-based lending is the accurate assessment of the IP’s value.’

Quantifying a monetary value of IP is definitely a ‘nuanced and complex task’, and while any effort to demystify it is to be applauded, unfortunately, landing on an actual number value of IP is extraordinarily difficult and is based on large part on a set of assumptions.

A major issue in this is that by changing the assumptions upon which the valuation is based, which has a direct impact on the amount of collateral that a lending institution such as Natwest will recognize, put simply, how much money they will lend a business.

As a very simple example, if you assume that your IP right is valid, then the potential value of that IP right may be positive, but if that IP right is invalid, then the value is zero.

Many IP rights owners assume that their IP rights are valid and therefore ‘worth’ something. However, an IP right is a negative right, used to prevent competitors from copying a product or brand into which, usually a large amount of research and development cost has been sunk.  An IP right is only worth something if the product or brand that it protects, has value.

It is therefore very difficult to place a value on IP, without also valuing the underlying products or brands that are covered by the IP right, because that is what gives the IP right its value, the value of limiting the ability of competitors to copy.

So, whilst the launch of the Natwest lending scheme is a welcome addition to a landscape which struggles for recognition of the value of IP rights, we need to take a balanced view.

Not every business will be able to access the scheme and not every business will have IP rights that will be recognized as being valuable.  It is a scheme which will fill a gap, but it will not solve the underlying issue, that IP rights, in and of themselves are only valuable if valuing the underlying products or brands that are covered by the IP right, are worthy of the IP protection.

If you have any questions about this new scheme please contact one of our attorneys.