Innovation from Lombard is unlocking the value of software intellectual property, says Keith Nowland, regional sales director at Lombard Technology Services
Despite the importance of digital technology to the 21st-century economy, businesses struggle to borrow against software intellectual property (IP) assets. But innovation from Lombard in the asset finance market means companies can now unlock capital invested in their IP.
Asset finance has been with us since the heyday of the Industrial Revolution when the fast-growth companies of the day borrowed against their equipment to fund further expansion. Today, it plays an important role in helping businesses raise cash when they need it, allowing them to acquire new assets to become more efficient, increase production, stay ahead of the competition and, ultimately, boost profits.
Lombard has been at the forefront of the market for more than 150 years, although the nature of asset finance has inevitably changed in that time and continues to do so. This means that Lombard is continually focused on innovating and developing new solutions to meet customers’ needs, something that has been driven partly by the advent of the digital age and the different assets that can now be funded.
Traditionally, assets were seen as tangibles such as plant, machinery and vehicles. Wind the clock back 30 years and a manufacturer would have been mainly spending on the production line. Today, the machinery may still be running, yet the operation will be underpinned by sophisticated software systems that not only run the manufacturing process itself, but also the procurement and distribution operations.
‘It’s much easier to do if the IP has already been licensed and you can see the revenue, the income and what the market or potential market is’ - Michael Ellis, IP consultant
It’s this type of software – and the IP associated with it – that UK businesses are investing in heavily. These intangible assets have a value suitable for use as financial collateral, which has been the focus of our technology division, Lombard Technology Services, in developing a finance product that can be applied to IP.
According to a survey carried out for innovation agency Nesta, British companies invested £137 billion on intangible assets in 2011, compared to £89 billion on tangibles, with around £24 billion of that earmarked for software. That’s a significant amount of funding which businesses could unlock through asset finance.
The general principles of asset finance have not been widely practised in respect of software IP. As Martin Brassell, chief executive at Inngot and co-author of Banking on IP, a report that examines the issues, says: “Conventional asset finance is mainly concerned with helping companies finance the buying of new plant and machinery, equipment or property. Such equipment often includes something IP-related, such as branding that contributes to value or software to make it work, but the intangible elements per se are seldom considered.”
This is where Lombard Technology Services has stepped in. With an existing specialism in lending against IT and technology assets, and a strong track record in this complex market, Lombard Technology Services has been well placed to develop an innovative way of filling the gap. Experience of providing businesses of all sizes and across all sectors with different technology assets has given it the knowledge to spot the opportunities presented by software IP. It has therefore developed a new product – Software Licence Solution (SLS).
In doing so, Lombard Technology Services looked to give funding options to companies that own the IP to business-critical software. There have been clear challenges associated with the treatment of software IP as assets in the past. These include the difficulty of giving a value to software IP assets, taking security and, if need be, realising that security. Because of this, banks have been reluctant to accept software IP as collateral for conventional secured loans. Lombard Technology Services have now started to overcome these challenges.
‘It’s great to work with a company like LTS that really get the tech space and have been bold enough to develop this genuinely unique product – that’s a rare thing in banking’ - Neil Bellamy, head of technology, media and telecommunications, and services at Royal Bank of Scotland
How SLS works
Designed to benefit well-established, revenue-generating businesses, SLS is based on a software licensing model. Businesses can borrow against the capital invested in their IP, with the sum repayable over a three-to-five-year term. In return, Lombard Technology Services takes ownership of the software, but licenses back exclusive use to the business, which gives Lombard Technology Services security against the loan while freeing up cash which the borrower can reinvest. At the end of the agreement, the borrower can either continue using the rights through an ongoing annual licence fee, at a nominal rate, or introduce a third party to buy the IP.
A key issue is effective financial and technical due diligence of the asset to enable Lombard Technology Services to attribute a value to the IP using a mixture of revenue, research and development expenditure, and market assessments. Essentially, they can fund IP on business-critical software that’s not only essential to the running of a company, but which also has a clear value to the business. To qualify, the IP should be developed in-house, including development outsourced to a third party, under the full ownership of the borrower and either licensed to their customers or underpinned to services they provide.
It’s a solution that gives companies an opportunity to raise cash when they need it. That cash might be used to further develop IP or to expand operations. This has long been the role of asset finance, with lenders providing growth capital, which invariably involves a certain amount of risk, while assuming rights over the assets. And as the software IP market develops, companies will increasingly be able to fund growth by using their digital assets.
In this technological age, software not only underpins a whole range of business operations, it plays a vital role in cash generation. In this current environment, it is essential that businesses can draw on the value of both tangible assets and their business-critical IP. That’s a challenge for the finance industry. It’s a challenge that Lombard Technology Services has begun to meet and in the coming years we are certain to see further innovation in the marketplace.
Security may be required and product fees may apply.