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As CFOs continuously seek money to fund key projects, they often turn to equity or debt financing. Mortgages, capital equipment loans, secured lines of credit and leases are just a few of the common debt instruments that come into play when funding growth initiatives. As intellectual property becomes an increasingly large part of a corporation’s assets, loans based on the company’s IP (or the royalty revenue it generates) are becoming an exciting alternative to tying up equity or capital assets as loan collateral. If your client is considering using patent royalties to secure royalty financing, here are some things to watch for: • Review current debt financing agreements and establish to what extent your client has already secured its intellectual property against existing loans (read the fine print). • If your client’s IP is already used as security, either (1) negotiate with the bank to break out intangible assets from the current collateral list, or (2) prioritize repayment of the debt so that the security is released. • Work with other members of the company’s Patent Quality Management Team to identify a few key patents that could generate significant revenue from licensing income, and work these patents into the forefront of your client’s licensing efforts. Create the maximum future royalty value because this will be the basis for determining the amount of the loan your client is likely to receive. • If your client does secure royalty financing, be aware that a holdback, or reserve, may be required to cover a drop in the royalty payments based on any number of factors. Even if your client doesn’t have current royalty streams, if the company can present a plausible case to the lender, they may still consider future royalties as a loan basis. Creativity is the key. In 1997, the Bowie Bonds funded $55 million based on projected licensing revenues from rock star David Bowie’s record albums, secured only by the future royalty income stream. These guidelines may need to be modified to conform to the legal requirements of your jurisdiction. It in no way constitutes legal advice. Andy Gibbs is the founder and CEO of PatentCafe, the Internet’s largest intellectual property network. Bob DeMatteis is author of the book, “From Patent to Profit.” For information on purchasing the book, “Essentials of Patents,” click here.

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