Yesterday, President Obama announced new efforts to help small businesses through the Small Business Administration (SBA). The heart of the program is to have the Treasury Department by up SBA guaranteed loans from banks, so that banks have more capital available to lend to small businesses. The proposal also raises the SBA guarantee to 90% of the loan value.
Let me suggest another step the Administration could take to increase the flow of financing to small businesses: help small and medium size businesses borrow against their intangibles assets. As noted in our report Intangible Asset Monetization: The Promise and the Reality (and our paper "Building a capital market for intangibles"), the SBA is in a perfect position to take the lead in using intangibles to finance economic growth.
Use of intangibles as lending collateral is not unknown -- even if it is rare. There is a long history of such financial transactions. The first trade secrets case in the United States involved the debt on a bond secured in part by a secret chocolate-making process in 1837. In 1884, Ara Shipman loaned Lewis Waterman $5,000 to start a pen-manufacturing business, secured by Waterman's patent.
In recent years, a number of creative firms and entrepreneurial companies have structured financial arrangements secured by intangible assets and intellectual property to fund further innovation and business development. Even in the last Presidential campaign, Senator John McCain used an intangible -- his donor list -- as collateral against a loan.
The problem is not the ability to use intangibles as collateral. The problem is the lack of standards to make these transactions efficient and transparent. Each deal seems to be a one-off. As long as lending against intangibles is a unique undertaking, the transaction costs and the uncertainty risks associated with the deal will limit their widespread use. The creation of underwriting standards would greatly reduce the transaction costs and clarify the uncertainty.
So in the current situation, small and medium size businesses that are cash-poor but intellectually-rich are denied access to a source of financing that could drive further innovation. The SBA is in a unique position to remove this hurtle. Two actions are called for:
• First, SBA rules on lending against intangibles are unclear. The Administration should review laws and regulations to ensure that SBA loans can be used for the acquisition of intangible assets, and that intangible assets can be used as collateral for such loans.
• Second, the SBA should work with its commercial lenders to develop standards for use of intangible assets as collateral, similar to existing SBA underwriting standards.
Opening up this new channel of financing could help small and medium size companies find the money they need to continue innovation and technology development. This is especially important in today's economic climate where traditional credit has dried up and funds for new development are hard to find.
By the way, Athena Alliance is in the middle of a project to detail case studies of intangible asset lending. More on this later this year.
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