DEPUTY Prime Minister Teo Chee Hean (above in photo) recently announced that a new intellectual property (IP) financing scheme would allow local companies to use their IP as collateral when applying for bank loans.
The scheme, to be launched next year, is a step in the right direction for the Singapore financial system and economy.
Despite Singapore's sophistication as a leading financial centre in the region, both local and foreign banks here have traditionally been reluctant to lend money based solely on the security of intangible assets such as patented technology or copyrighted animated feature films.
The reason? Unlike land or equipment that can be easily sold off, IP often lacks ready buyers. In financial market parlance, the market for IP is less liquid.
Imagine a start-up that creates a unique software-based technology for movie subtitling that is of great interest to movie distributors. If the company raises $1 million in the form of bank borrowings and is unable to repay the loan, can the bank sell off the asset in the event of a foreclosure?
Another challenge is valuation.
Banks and financial institutions typically finance up to 60 to 70 per cent of the value of the security or collateral. This is the buffer they need to protect their financial interests. While it may be easy to value land based on market data and trends, how do you value subtitling software for the movie industry?
Sure, the financial industry has evolved a range of methodologies to value intangible assets such as the cost, market or income approach that takes into account the value contribution of intangibles such as IP and brand value.
But the use of such valuation methodologies really depends on the types of IP, the complexity of the technology and the marketplace that is being evaluated as part of the entire system.
Under the new financing scheme, the Government will partially underwrite the value of companies' IP to be used as collateral for bank loans.
Back in 2010, Prime Minister Lee Hsien Loong announced that the Singapore Government will spend $16.1 billion over 2011-2015 on research, innovation and enterprise.
This new IP-based financing will complement and further enhance the Government's strategic investment into R&D and IP creation.