3 key factors to get financing on intangible assets
4 minutes read
Borrowing on intangible assets is an issue for many companies, including tech companies.
In an economy increasingly driven by knowledge and innovation, intangible assets—which include software, databases and intellectual property—occupy a growing place on business’s balance sheets. As a result, this type of financing has been gaining momentum over the past decade.
"The fact remains that intangible assets are more difficult to assess and therefore optimize, hence the need to be well prepared before meeting with your banker," says Marc-André Maheu, Senior Account Manager, Technologies Group, at BDC.
Many factors will be taken into account, but here are the main elements you should focus on to make a good impression.
Sound financial management
You have to show that you have a good grasp of your company's finances. This includes keeping a close eye on your working capital, a good indicator of the financial strength of your business.
"We want to make sure that the company will be able to repay the debt," Marc-André explains. "Ideally, this means projecting enough cash flow in the next two years to cover operating expenses and the new debt."
It will be useful to provide a profile of the company since its inception:
- How has it progressed?
- What were the turning points in its development?
- What financial results have you achieved?
Your personal net worth and that of your associates will also be considered. "You need to watch your level of indebtedness," Marc-André cautions. "It's not uncommon for an entrepreneur to use up all of their savings or finance their start-up with their credits cards. Being in business with a bad credit score is not a good idea."
Should that be the case, there are different strategies to get financing regardless your credit score. But one thing's for sure: It's important to be transparent with your banker if you want to build a relationship of trust.
A strong management team
The strength of the management team can make a big difference in getting a loan.
- Who are the people running the company?
- Do they have business experience, or are they just getting started?
"The case will be more delicate to assess if you are a start-up," Marc-André concedes. "You need a solid business plan. Also, it will all depend on the amount sought."
In addition, the banker will want to know if the management team has good support.
- Is there an advisory committee or board of directors in place?
- Who are the members?
- Do they have a history of success?
Being well supported is one of the keys to success in business. Having one or more mentors and building a formal or informal network of experts can make a difference in your journey and the company's results.
"Business transfers also fall into the category of intangible-based financing," says Marc-André. "Even if real estate assets or equipment can be taken as collateral, the value of the company could be higher [than the value of the collateral]. Financial capacity and succession management experience will then be considered."
A proven business model
Your business model will be analyzed closely.
- What does the company sell—products or services?
- What is the sales cycle?
- Do you generate repeat business?
- Is it a technological tool or service offered with a monthly subscription formula that guarantees a regular cash flow?
- Does the development project create a new revenue stream?
You will have to demonstrate the value of your growth plan and present clear strategies with realistic financial projections. This requires an objective analysis of market potential.
"You need a proven business plan that can change over time to be able to determine the future success of the company," Marc-André explains.
Get a strategy to protect and manage intangible assets
It’s important to have an IP strategy that leverages, protects and manages your company’s intangible assets. You can protect your company’s intangibles by filing the necessary patents, trademarks and copyrights.
Your company can be “rich” with intangibles, and you may consider getting a third-party valuation of your intellectual property portfolio if significant investment has been made in order to give your lender a sense of the value of them, says Ryan McCartney, BDC Communitech Partner.
Brokering, selling patents or licensing agreements on IP that provide revenue streams can be considered when financing intangibles. The value of intangibles can be calculated either by liquidation value (at what price would you sell these assets if you were simply selling the patents, a worst-case scenario) or market value (what value will this IP bring strategically to someone who can increase their sales or reduce their cost to develop similar technology).
Financing an intangible asset: A more difficult loan to structure
Lastly, don't wait too long. Financing on intangible assets is more difficult to structure, and the application will take longer to analyze and proceed.
Traditional financing can be given for a loan of up to $1 million. Beyond that, you will need growth capital and will be directed to the BDC Capital team, which can lend up to $35 million.
"A solid application can be closed in three or four weeks. It all depends on how prepared you are and how sophisticated your application is," says Marc-André.