IP FINANCING IN THE FINTECH INDUSTRY

Introduction

Financial technology also known as Fintech is utilised to depict new tech that looks to improve and mechanise the conveyance and utilisation of monetary administrations. At its centre, fintech is used to help organisations, entrepreneurs, and buyers better deal with their monetary activities, cycles, and lives by using particular programming and calculations that are utilised on PCs and, progressively, cell phones.

As of now, around the world, there are 187 Fintech unicorns of which 21 unicorns are in India. These are Acko, BharatPe, BillDesk, Chargebee, Paytm, Mobiwik, Oxyzo, PhonePe, Pine Labs, Coin DCX, Coinswitch Kuber, CRED, Slice, Razorpay, Cred Avenue, DIGIT, Groww, Policy Bazaar, Zerodha, Zeta. Fintech is fast growing industry which is supported by many government schemes as well. 6636 fintech startup’s are registered in india like the Jan Dhan Yojana.

In fintech IP plays an important role, various IPR’s may exists together in a segment of Fintech depending on the nature of tech and innovation involved which may include

• Software code – the source code which refers to set of computer instructions, which is used can be protected as a trade secret. The code can also be protected under the copyright laws.
• Algorithm – it’s a specific set of rules or laws which is a very common element in the fintech industry. It contains mathematical calculations and even contain AI (artificial intelligence) which can be protected as a Trade secret and can even be patented.
• Innovation care – protecting an invention shall be the most important aspect of the Fintech industry. Any innovation can be registered as a patent and get protection in the patent act.

1. The Benefits of Intellectual Property Finance

• Intellectual property finance offers credit markets to “hard-asset-light” service enterprises that require asset-based funding.

• IP finance may attract lenders under a credit-enhancement framework by lowering the borrower’s risk profile if the IP is transferred to a special purpose, bankruptcy-remote investment entity.

• IP finance can increase liquidity for investment in initiatives with returns that outperform the cost of financing.

• By leveraging IP financing arrangements with favourable conditions, companies may be able to restructure high-cost debt, solve liquidity problems, and avoid equity dilution.

The Benefits of Intellectual Property Finance

• Intellectual property finance offers credit markets to “hard-asset-light” service enterprises that require asset-based funding.

• IP finance may attract lenders under a credit-enhancement framework by lowering the borrower’s risk profile if the IP is transferred to a special purpose, bankruptcy-remote investment entity.

• IP finance can increase liquidity for investment in initiatives with returns that outperform the cost of financing.

• By leveraging IP financing arrangements with favourable conditions, companies may be able to restructure high-cost debt, solve liquidity problems, and avoid equity dilution.

Disadvantages of Intellectual Property Finance

• In most cases, the valuation utilised in IP financing is based on a liquidation value, which gives lower proceeds to borrowers while benefiting lenders in the event of default.

• When intellectual property (IP) is a firm’s mission-critical asset pledged as collateral, a technical default in the financing arrangement could result in the liquidation of all company assets, including tangible assets.

• Because of its uniqueness, IP finance is frequently more expensive than traditional financing choices.

• Intellectual property assets are valued depending on secondary market demand. However, lenders may find it difficult to identify possible suitors of defaulted IP debt for truly unique IP.

Ways of financing in the fintech industry

The traditional methods of financing meant leveraging tangible assets for loans and credit, IP financing is a new and growing form of financing. IP assets are intangible in nature and are majorly leveraged to obtain credit.

Traditionally there were three ways of leveraging IP which were an assignment, licensing, and sale. The owner of the IP would lose the rights over the IP assets either completely or partially in traditional methods of transfer. However, there are ways by which IP owners can retain their exclusive rights as well as gain credit which include auctioning intangible assets, using IP as collateral, and mortgaging IP assets.

• AUCTIONING OF IP

Auctioning of IP is performed by auction houses on a regular basis. These auction houses specifically perform IP auctions, they hold auctions online. Auctioning IP helps IP owners to get access to quick liquidation. It also creates a marketplace for interested and potential buyers to have access to these intangible assets, which otherwise would be difficult to find. There are several companies conducting IP auctions some of which are Ocean Tomo, IP Bewertung AG etc. There are online exchanges as well like yet2.com runs an online exchange known as a technology marketplace, and a technology trading exchange which is run by Tynax.

• USING IP AS COLLATERAL

This is another method of financing IP, in traditional sense tangible assets like land or goods were used to obtain loans. However, using IP as collateral can be used as a method to obtain credit. The owners of trademarks, patents and copyrights can get a successful loan.

• MORTGAGING

A legal mortgage is the most secure type of security transaction, but it also requires that the IP be assigned to the lender and a license be granted back to the debtor. The issue, in this case, is that the lender becomes the IP owner and has full control over the IP rights. This could jeopardize the debtor’s ongoing business as well as sub-licenses.

• IP ROYALTY SECURITISATION

Deals involving the securitization of intangible assets have made it easier and safer for owners of intellectual property rights to borrow money from adequately secured lenders. IP asset-backed securitization is becoming more and more common in technology and software. The process of IP royalty securitization often involves an IP owner selling a fixed-term IP-related income stream in exchange for a non-dilutive upfront cash payment. The key distinction between securitization and an IP-backed loan is that the IP owner is selling a stream of future cash flow rather than borrowing money.

Conclusion

IP financing is increasingly becoming a preferred method by many startups to obtain credit. Unlike in the traditional methods they don’t have to deal with tangible assets, they can just obtain credit against their registered intellectual property and the rights to the intellectual property can remain with them. With the rise in the awareness of IP , businesses have started incorporating a long-term IP plan in their business strategies at the initial stage itself. Thus, this helps them to obtain loans at the initial stage without owning tangible assets.