One asset which is under-appreciated by both borrowers and lenders is intellectual property, particularly patents and trademark registrations. Such assets may allow expansion of borrowing bases – i.e. allow borrowers to borrow more – and enhance lender security. Credit agreements customarily cover ‘intangible assets’ such as receivables or notes, but there is no inherent reason why they can not cover patents and trademarks as well.
While institutional lenders must comply with regulatory obligations which may impact permissible collateral, other lenders are free to accept and lend against these items in the same manner as all other collateral. Borrowers having substantial amounts of such assets should make sure to discuss the same with potential secured lenders.
All parties interested in going this route need to keep in mind several fundamental considerations:
- Proper description of this collateral (by number and date) in financing documents is essential; a reference to ‘all intellectual property’ is not likely to be sufficient
- Several governmental filings, going beyond UCC-1's, are necessary;
- Lenders need input from technical subject matter experts to extablish commercial value of items - all patents are not created equally! A patent which is clearly valid , but which has only two years left in its term or pertains to obsolete technology, is of no more value than obsolete, unsalable inventory;
- Lenders proposing to lend substantial amounts against such assets (especially those involving software or ecommerce) will usually want input from patent or trademark counsel as to the likelihood that they will withstand legal challenges to their validity. Recent developments in statutory and case law create a number of questions.
- While pending applications can, in theory, be used as collateral, in practice, the burdens of their completion in the event of foreclosure may minimize their value.
- Loan and security agreements should specifically provide for the mechanical steps associated with foreclosure on these assets, which will differ from those associated with real estate, inventory, machinery and even receivables.