NatWest launches IP-backed lending for high-growth SMEs

In what is claimed to be a banking world-first in terms of its availability and affordability, NatWest has launched lending for high-growth SMEs secured against their intellectual property assets. The bank has partnered with valuation specialists, Inngot, who will provide a valuation of a business’s IP that can then be used as collateral for loans starting from as relatively little as ￡250,000. Deputy Chief Executive Neil Lampert spoke to the two men behind the initiative, NatWest’s Neil Bellamy and Martin Brassell, of Inngot, and was told that the development is expected to influence policy-makers as well as boost UK productivity.

High-growth SMEs generally own few tangible assets, but are often rich in IP and other intangible assets. Because of their lack of fixed assets, fast-growing scale-ups can find it difficult to secure growth funding. This has led to a large funding gap in the UK estimated at ￡15 billion p.a.[1]

High-growth scale-ups are defined as businesses that grow at more than 20% p.a. and, according to the latest report from the ScaleUp Institute,[2] they are having a huge impact on the UK economy in relation to their size. In 2023 there were 28,410 scale-ups which generated a total turnover of ￡1.3 trillion (58% of the turnover of all UK SMEs) and employed 2.6 million people, despite making up just 0.5% of the SME population.

NatWest has become the first UK high street bank to step in and offer a loan product that can match the ambitions of these fast-growing, asset-light businesses by directly harnessing the their IP as collateral. If an SME has patents, or other IP, that Inngot can confirm are suitable as security, NatWest is prepared to lend them up to 50% of the estimated IP value, over up to four years.

Martin Brassell, Co-Founder and CEO of Inngot and a member of CIPA’s IP Commercialisation Committee, said: ‘This is a very significant development. It’s a turning point in terms of being able to realise value from IP.

‘This is not the first time IP value has been taken into consideration by a mainstream UK commercial bank: HSBC UK has been using our IP valuations to provide comfort on Growth Lending deals for a while. Their core appetite is to lend ￡5m to ￡15m to help businesses with strong venture capital backing to bridge to profitability.’

Accessible and affordable

‘However, NatWest’s product marks the first time we have seen a UK bank willing to attribute collateral value directly to IP assets, including patents, at repayment levels that are highly affordable. The ￡250,000 starting point makes IP-based funding accessible to growth companies at real scale.’

‘This product represents an attractive alternative to raising money via equity, and getting diluted. It also rewards UK SMEs for investing in IP, and I believe it will help more companies to realise the importance and value of a strong IP strategy. I can’t think of a better way to encourage SMEs to take IP more seriously than to show them that they can borrow against its value.’ Neil Bellamy, Head of Telecoms, Media and Technology (TMT) for the NatWest Group, has developed this initiative with Brassell. Both men attended a world IP finance conference held by WIPO in Geneva in November 2023, where they first shared news of the product.

Bellamy said: ‘I can confidently say that we are the first bank globally to do this at scale. We did already lend to intangible balance sheets. My balance sheet is ￡14 billion and most of that is to companies with intangible assets. But these are all to much larger firms at a later stage of their development. To have a high-growth IP loan that starts at ￡250,000 is a real game-changer.

‘WIPO commissioned a UK report as part of their global finance review which gives a good picture of the three types of lending that are going on at the moment. There is venture debt lending, which is very niche, expensive and unsecured – we have done that for quite a few years, as does Silicon Valley Bank, which is now part of HSBC in the UK.

‘HSBC do work with Inngot to get an IP valuation, but it’s not really lending against the IP as such, it’s lending against the cashflow of the business, with the IP report providing better visibility of its value drivers. In the WIPO report, Unlocking IP-backed Financing it’s known as “comfort lending”.’

‘HSBC do work with Inngot to get an IP valuation, but it’s not really lending against the IP as such, it’s lending against the cashflow of the business, with the IP report providing better visibility of its value drivers. In the WIPO report, Unlocking IP-backed Financing[3] ? it’s known as “comfort lending”.’

Brassell said that, with the launch of this product, NatWest is demonstrating that it recognises where the value in the knowledge economy really resides, with IP assets ‘front and centre’. He added; ‘NatWest can use all forms of IP as security – patents, trade marks, designs and copyright – provided they are clearly identifiable, owned and controlled by the business, and have commercial traction. We can take applications as well as granted and registered rights into account in making our assessment.

‘The cash flows generated by the business must have a clear relationship with these IP assets, otherwise it becomes very difficult to be confident of their current value. This relationship to revenue could either be through sales of a company’s own products and services that are protected by the IP, or through licensing.

‘Clearly, we are not re-inventing basic lending principles; a business must still be able to show it can repay the amount it wants to borrow. But this is the first time a UK lender has gone this far in terms of building IP as security into a product and recognises that it reduces their risk if the business has a good strong IP portfolio.’

Brassell said that it was also significant that the NatWest product was supportable by all of its relationship managers in England and Wales (there are security interest reforms currently under way in Scotland that should see the product available north of the border soon).

‘Until now, IP-backed lending has only been offered through a certain team,’ he said. ‘With this product, any relationship manager can have a conversation with the customer across the entire bank.’

Bellamy has worked in banking for 30 years, the last 20 in leadership roles for NatWest and the last ten in his current role where he has responsibility for strategy, proposition and risk for the TMT sector. He describes himself as an ‘IP evangelist’.

Most of his customers don’t have tangible assets such as factories, print presses or big head offices. They have been built on ideas and Bellamy wanted to develop a lending proposition that recognised and valued this fact. He was also keen to point out that opportunities exist across all sectors from AgriTech to MedTech, advanced Engineering to Fintech.

NatWest previously developed an IP offering via its Lombard Asset Finance business based on a sale & licence back of software. Bellamy said: ‘We learnt a lot about funding intangible assets but it was quite complicated, only available on software and so difficult to scale.

‘I was trying to come up with the bank’s first proper, SME-focused, scalable, simple senior debt term loan facility… direct security, just as we do with every other loan, but rather than taking security over physical property or a fixed asset, we are doing exactly the same but with intangible assets.

‘And so, yes, it is software, but it’s also patents, brands, copyright. So we get a proper bundle of IP that we lend against.

‘We’re the first to actually take a collateral view of this. We’re still taking the debenture, including a floating charge over the company’s assets, but we’re also taking a fixed charge over the IP that Brassell is identifying.

‘We’re taking a view on that IP as collateral and lending up to 50% of its value. I spent quite a lot time with Brassell refining that to come up with a bankable collateral amount.’ Bellamy said that Brassell’s view on future cash flows was adding real value to the bank’s lending appraisal. He described it as a triangulation of cost analysis, market value and a value in current use of future revenues, seen through a licensing lens.

‘It really aligns the customer’s valuation with the bank’s,’ he said. ‘For many years in intangible balance sheet-led businesses, you got a real disconnect between the funder’s motivations and collateral and the company’s.

‘If you’re a big manufacturer or printing company, your most valuable assets are the factory and the print presses and they drive future cash flows.

‘For intangible companies, you’ve got a leasehold premises that you can get anywhere and your most valuable asset is in software or patents that the bank doesn’t understand, care about, or take any account of as collateral.

‘In the past, in situations like this, banks have said: ‘Can you give us a personal guarantee or give us a charge over your house?’. This results in a misalignment of assets, future cash flows and the interests of the bank and the company. What we’re doing is bringing that together.’

Brassell believes it is ‘inevitable’ that this new recognition of the fundamental value of IP will influence policymakers, particularly those responsible for innovation and growth.

‘It is logical that IP must form a part of any innovation strategy,’ he said. ‘IP is far more scalable than any tangible asset can ever be. This move by NatWest sends a really good signal to the market and to government. And this isn’t the final destination – it is a marker along the road that will enable the asset class to be better understood and used.

‘We know that IP isn’t traded on transparent markets routinely, in the way that other, commoditised assets are. This has always been cited as an impediment to harnessing the value of IP. However, in my view, we have to learn how to harness intangible asset value without having to sell them, but by recognising their value in use.

‘After all, IP always creates value in a certain context. The whole point of IP is that it delivers value by being unique and special. We should not ‘beat it up’ because it does not behave like a commodity – that’s the point of having it. IP is the nexus between uniqueness and scalability.’

Bellamy said that, the majority of UK banks do not assign a business a relationship manager but all NatWest high-growth firms get a names manager with a specific high-growth proposition and lending policy.

Bellamy said ‘to retain our no.1 market share in the SME market we provide a relevant and value add proposition early in a firms high-growth lifecycle and that includes being enabled to lend earlier’

Bellamy said that the opportunities in engaging with the scale-up sector were huge. NatWest has identified 166 existing high-growth, IP-rich scale-up customers that had already raised ￡5.5 billion of equity.

‘When we have gone out and done further trials of prospects the opportunities are ten times that, so we’re talking about more than 1,000+ customers, potentially. ‘The attraction for these companies is to use debt to fund high-margin growth, as an alternative to giving away equity in their business. Compared to the cost of equity, debt can be highly attractive.

‘This could also help university spin-outs, provided they own and control their IP. We’re saying: ‘Bank with us through your entire journey because, when you get to scale-up, this is something that you can use’. We are talking to the main universities across the UK and their spin-outs to say that this could be available to them.’ NatWest uses a scorecard approach to identify high-growth scale-ups. Points are given for 20% yoy turnover growth for the last three years, raising ￡50,000+ of equity.

‘These high-growth scale-ups especially those with IP are lower risk and that’s the key point,’ said Bellamy.

‘Before Covid hit, a key piece of research was completed by the British Business Bank and UK IPO which found that default rates are about 40% less if a business owns any form of IP, and loss rates are 50% lower. Not necessarily patents, or lots of IP, but any registered rights.

‘That was quite a light bulb moment for me. I could take that to my credit teams show that these high-growth businesses with IP are actually lower risk.’

Boosting UK productivity

Bellamy said that the bank believes that IP-backed lending could boost UK productivity. He said NatWest’s chief economist, Stephen Blackman, is another IP evangelist who regularly tells policy makers that unlocking the value of the intangible economy is the key.

Bellamy said: ‘The reason why its so important to try and lend at scale is to establish a loss rate. That sounds counter intuitive but because banks don’t have a loss rate agreed with the banking regulators, they have to set aside 100% of the loan amount in capital – making it very expensive. If we can establish a loss rate then it provides an incentive for banks to lend against IP with savings that can be passed onto the customer. A virtuous circle.’

‘I am most interested in is taking this cross sector,’ added Bellamy. ‘So AgTech, FinTech, climate tech etc, with the more interesting and potentially game-changing ones in sectors like MedTech, DeepTech and materials tech. This proposition is purely to try and be the first bank that engages with scale-up SME companies with something that is relevant for them. We want to give our customers what they really want, which is the three B’s: to get backed, to get big and to get bought. And then do it again.’

Neil Lampert, Deputy Chief Executive

[1] .?? The Future of Growth Capital, ScaleUp Institute, Innovate Finance and Deloitte, 2020

[2] .? www.scaleupinstitute.org.uk/wp-content/uploads/2023/11/SUI_AR23_Highlights_-Website-Version-FINAL-v2.pdf

[3] .? www.wipo.int/edocs/pubdocs/en/wipo-pub-rn2023-42-en-country-perspectives-the-united-kingdom-s-journey.pdf