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Getting a Loan with Your Patents


Written by Mark Nowotarski
Markets, Patents & Alliances, LLLC
On Twitter: patentbuzz
Posted: June 21, 2012 @ 7:20 am


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Did you know you could secure a business loan with your patent(s)? Many people are unaware that a patent or patent portfolio can be used as collateral to secure a loan, but if you take a look at the assignment records at the USPTO you can see just how common this practice really is.

An assignment indicates who owns an issued patent or pending patent application. They are registered with the USPTO and available for public inspection. There is a special type of assignment called a “security agreement”. A security agreement indicates that a patent owner has used its patents as collateral for a loan. The security agreement says that the lender will get ownership of the patent if the current patent owner defaults on the loan. The security agreement also restricts what the patent owner can do with its patent so that the value of the patent is preserved. A patent owner might be obligated, for example, to pay the maintenance fees for an issued patent. Once the loan is paid off, the security agreement is released. If the loan goes into default, however, the ownership of the patent is transferred to the lender.

A formal patent valuation is important for determining how much of a loan a patent portfolio can support. There are consulting firms that specialize in patent valuations, like GTT Group. I spoke with Dan Buri, Director of Asset Services for GTT Group, about the overall patent valuation process. He indicated that lending is often based on a total company valuation with patents supporting the valuation. Key drivers of patent value are current and forecasted demand for the patented invention(s), evidence of use in the market, and the remaining life left on the patent(s). Patent valuation, however, is dependent upon market circumstances and the end goal for the valuation. For instance, a company valuing a patent from an internal defensive perspective will likely approach the overall patent portfolio value differently than a company considering the patent portfolio’s offensive market value.

A random sample of 100 recently issued patents showed that 8 had security agreements. The companies getting these security agreements ranged from startups to Fortune 500 companies. Startups often need bridge loans to cover the gaps between successive rounds of funding. They use their issued patents and pending patent applications as collateral for the loans. Fortune 500 companies can face difficult times as their marketplace changes. They too may need to use their patents as collateral for financing. Citicorp, for example, has a security agreement on 7,176 Eastman Kodak patents.

Banks tend to be the primary lenders providing patent-backed loans. Equity investors and even angel investors also provide loans backed by patents. The banks tend to be those that focus on startups and emerging companies. Comerica Bank and Silicon Valley bank, for example, actively market their services to startups. Comerica has security agreements in place on 8,128 patents and patent applications. Silicon Valley Bank has security agreements in place on 16,124 patents and patent applications.

Once a loan is paid off the bank or other lender releases the security agreement and the assignee has unencumbered ownership again. Records of security agreement releases are also found in the USPTO’s assignment data base.

If a loan is defaulted on, then the lender becomes the owner of the secured patent applications or issued patents. The lender may sell off the patents or actively enforce the patents if there is significant infringement. There are companies that specialize in taking over repossessed patents for enforcement purposes. They are derisively known as “patent trolls”. No one likes a patent troll, but their activity supports the value of repossessed patents by creating a market for them. Without the support of patent trolls, many more startups and even Fortune 500 corporations might be failing since their patents would not have enough market value to collateralize their loans.

Patent(s) can be used to secure loans. These loans can be important sources of cash flow for emerging startups as well as struggling major corporations. Establishing a value for a portfolio of patents is important for securing the loan. Large and growing markets for the patented inventions, active infringement of the issued patents and significant years of remaining patent life are important factors for demonstrating the full value of patents to a lender. Patent trolls support this value by creating a market for patents taken over by lenders when the loans go into default. This helps make patent based lending an important source of business financing.


About the Author

Mark Nowotarski is the President of Markets, Patents & Alliances L.L.C. and is a registered U.S. patent agent. He currently serves clients in the consumer products, medical devices, financial services and manufacturing industries. Mark also consults in the field of crowdfunding of inventions on Kickstarter, Indiegogo and other sites.

Mark is a former Associate Director of R&D for Praxair. There he was responsible for the development and successful worldwide introduction of new products into the health care, electronics, and manufacturing industries. He was also responsible for technology planning for their home health care division.

Mark is an inventor on 17 US patents. He was appointed Corporate Research Fellow for the commercial impact of his inventions (+$300 million in sales).

Mark has a Master's degree in Mechanical Engineering from Stanford and a Bachelor's degree with honors in Aerospace, Mechanical Sciences and Engineering Physics from Princeton. His academic awards include the Sigma Xi award for most outstanding Mechanical Engineering research at Princeton and the Union Carbide Award for Academic Excellence and Leadership in Mechanical Engineering, also at Princeton.

21 comments
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  1. Any startup allowing the possibility of someone getting hold of their patent(s) either isn’t thinking ahead or the patents aren’t worth much.

    For a startup, if you truly need money, there are other ways to raise it – consulting, stay at your day job until you have enough cash, write some software, etc…

    Many startups would probably be better off to just sell the patent outright and take back a license rather than let someone else get hold of your core assets. At least that way they can still practice their innovations.

    >>> “If a loan is defaulted on, then the lender becomes the owner of the secured patent applications or issued patents. ”

    Exactly.

  2. Jodi,

    Interesting observations. Have you had experience in this area? It sounds like you might have some anecdotes that would be of interest to our readers.

  3. [...] Getting a Loan with Your Patents [...]

  4. Thanks for writing this, Mark. I have had arguments with self-proclaimed patent experts on LinkedIn about using patents as collateral for a bank loan. This “expert” insisted it couldn’t be done. The next day came the news that Ford had paid off their loans and could take back their trademark from the bank:)

  5. Tom,

    Thanks. Feel free to direct the expert here for further conversation.

    I saw a release of a security agreement in about 20% of the cases I looked at. That indicates that at least some of these loans are getting paid off.

    I didn’t see any out and out transfers of ownership which would imply a defaulted loan. That indicates that those making the loans are doing a good job underwriting them.

  6. Thanks for this article. I had not previously known about the use of patents and patent applications as collateral for loans; but naturally it makes perfect sense. I imagine that this tactic could be of great benefit to independent innovators and startups, in particular — though of course startups might face the Catch-22 of proving monetization value to lenders.
    http://www.aminn.org/patent-legislation

  7. I would like information about getting a loan against my patent.
    How much loan can I get?
    patent #6035680

  8. Betty,

    Interesting invention. The answer, as we’ve indicated above, really depends upon the commercial prospects for your invention. If there is a proven market, then that increases the value of the patent and hence the amount of potential loan.

  9. Interesting article in that the idea of securitization of payment obligations using intellectual property (IP) is not new. The now famous “Bowie Bonds” issued in 1997 and the funding of the medical building, ” The Congress Avenue Building”, at Yale University in 2000 are examples of such securitizations. However, there seems to be a rekindled interest in the concept. There is actually an Intellectual Property Insurance Policy that will cover defauts on loans secured by IP collateral.

  10. Additionally, the lender may opt to loan to you only if you agree to a set of potentially crippling conditions. A lender may ask you to sign over the rights to the patent and then license it back to you, which gets you a loan but costs you ownership of the patent. A lender may also ask you to defend the patent at all costs, which opens the door to the lender holding you accountable for costly legal battles. As a result, even if you are able to take out a loan against a patent, it may not be a sound financial decision.

  11. A lender who is asking for an exclusive license or assignment to perfect his security interest in a collateralized patent is merely protecting the collateral from other creditors. When the loan is paid back the interest in the patent – collateral is released. IP insurance policies for IP enforcement and defense make the litigation burden affordable during the product development phase.

  12. Really interesting article…
    Are these security agreement indicated in patent assignee bulk downloads?
    Can you actually see Kodak assigned patents to citibank in the assignee file?
    would you know where I can get a database of either IP licensing agreement or loan agreement on collateralizing these IPs?
    Are these loan different than any other commercial loan collateralizing on tangible assets?

    Thank you in advance!

  13. Rob,

    Records of the security agreements are found on the USPTO assignments web site http://assignments.uspto.gov/assignments/q?db=pat

    You can search by assignor (e.g. Kodak) or assignee (e.g. Citibank).

    Since Kodak is a publicly traded company, you may be able to find copies of the security agreements on the SEC web site.

    I don’t know enough about different loan types to comment on how they might be different that loans collateralized by other tangible assets. One of the challenges would be valuing the patents. The market for patents is very illiquid.

  14. Thanks Mark! I really like the article. Most people won’t believe intangibles can be used as collaterals, but they are more frequently used than we know. Though I am guess many of them are supplement collaterals to tangibles in loans. It would be interesting to see loan collaterals comprised of entirely of IPs.

  15. Thank you so much for this info i am also a patent holder looking for a loan my patent a# D684 ,837 if you can share any advice or guidence it will be very much appreciated

  16. David,

    Interesting device. We currently have a series of articles on design patents you might want to look at. http://www.ipwatchdog.com/2013/07/30/strong-design-patents-the-power-of-the-broken-line/id=44215/

    In terms of loans, they key question a bank will ask is “How many are being sold?” The value of a design patent is based on the actual sales of a product, whether it is by you or a competitor. If none are being sold yet, you might want to consider crowdfunding. This is a good way to get funding for initial product sales. See http://www.ipwatchdog.com/2013/06/29/getting-your-invention-off-of-the-ground-with-crowdfunding/id=42567/

  17. I am the managing partner for KLW investments. We are in the business of arranging loans for tech patents. I can be reached at ron@klwinvestments.com or 650/533-0675. We don’t do green tech. Loans are structured for up to 48 months. We also arrange financing for patent violation lawsuits. The cost of these type of loans is less than using a contingency attorney.

  18. China now offering loans to SME’s secured by their patent portfolios. http://english.sipo.gov.cn/news/iprspecial/201310/t20131016_822170.html

  19. Mark,

    This is a very interesting article. In the USPTO assignment database, is there a way to search specifically for patents with security agreements? Or is there a way to replicate your search of recently issued patents and see how many have security agreements? Searching by assignor/assignee is helpful if you know the company you’re looking for, but I’d like to look at the results of a random search of patents, such as the one you performed.

    Thanks for the help!

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