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.