In IP pledge loan, banks play a pivotal role in lending against a company’s intellectual property. In 2008, the Bank of Beijing (BOB) successfully unveiled its IP pledge loan products. China IP held an exclusive interview with the BOB to learn more about its products and its attitude towards IP pledge loan.

China IP: What are the bank’s relevant IP pledge loan products?

BOB: Our bank mainly provide “IP Pledge Loan” products, including pledge loans secured against patents of inventions, utility models, and exclusive trademark rights according to different pledged properties. At present, our bank has launched operations for loans secured against utility model patents and exclusive trademark rights.

China IP: When did the BOB start to develop such products?

BOB: We started to develop these products in 2007 when we completed our preliminary investigations and valuations. In May 2008, our bank formally set up a research and development team for the program, completed products development very soon thereafter, issued measures to manage these products, and conducted trainings for these programs. In July 2008, our bank and the Beijing Municipal Science & Technology Commission (BMSTC) jointly held the “Signing Ceremony of Comprehensive Strategic Cooperation and Promotion of IP Pledge Loan Agreement” and formally launched the products.

China IP: What are the requirements for an enterprise applying for such loans?

BOB: The products mainly apply to technology-oriented, small to medium-sized enterprises (SMEs) that are able to pledge legal and valid IP rights and have marketed products using such IP rights on a certain business scale with the ability to perform and profit from these IP rights. First, if the borrower intends to secure aloan using patent and trademark rights as collateral, they must have been in force for at least two years and still effective. Second, the collateral must be clear of encumbrances, capable of registration and perfection, and freely alienable pursuant to relevant rules, and easy to be cashed. Third, the borrower must provide written legal and effective documentation, with the consent of the owner of the collateral. Lastly, the borrower must also meet other requirements adopted by the bank.

China IP: What are the detailed procedures to be followed when applying for this service, and how long does it usually take?

BOB: The borrower may either visit one of our branches to apply, or apply online of our bank’s website. Upon receipt of an application, the bank will work with the relevant intermediary institutions, which each perform different functions of pre-loan investigations, conduct a valuation of intangible assets, and conduct an examination of laws and regulations, among other things. In theory, the whole procedure will be completed within a week and loans will be issued, provided that the borrower complies with the bank’s requirements.

China IP: What are the options available in IP secured transactions? Which one is most favored by enterprises?

BOB: We currently have two options in IP secured transactions. The first is based on a loan against simple intellectual properties. The second method is cooperating with professional guarantee companies and providing reverse guarantees using an IP pledge. The options vary from enterprise to enterprise depending on their different situations.

China IP: Have there been any successful cases?

BOB: Take one successful case as example.  In that case, our bank granted a 5-million Yuan loan to an environmental science and technology enterprise in the Beijing Zhongguancun Science Park through an IP secured transaction. The borrower is a joint venture manufacturing and selling environment inspection equipment. The enterprise has a mature system of products and markets with sales outlets covering more than 20 provinces across China. It has a sound financial standing, but no real assets to offer as collateral. The resulting capital shortage has restrained its development. In line with the national macro-policy of promoting environmental protection, the enterprise has promising prospects. Knowing the above, we immediately conducted market research, made contact with the enterprise, and granted it a 5-million Yuan loan based on a pledge of its IP rights. The loan has helped the enterprise to take advantage of market opportunities and secure development opportunities.

China IP: What are the risks involved in IP secured transactions on the part of the bank? How does the bank manage these risks?

BOB: Following are the main risks in IP collateral. The first is the liquidity risk of IP collateral. The trading platform of domestic IP intangible assets is far from perfect and the exit mechanisms of risk are not smooth. The second is the valuation risk of secured collateral. The valuation of intangible assets demands strong professional skills and expertise. Different auditing firms may reach different audited values. Therefore, we are very cautious in our selection of professional auditing firms. The third is the legal risk. IP matters are very professional, and there are unexpected legal risks or disputes involved either in validity inspection, registration of a pledge, or the cashing of venture assets.

Considering the characteristics of risks involved in IP securities, we have taken a series of active measures to avoid them. Firstly, we work with relevant institutions, such as Liancheng Assets Appraisal Co. Ltd., the Jingwei Law firm and the Beijing Capital Guarantee and Investment Co., Ltd. The bank will take into consideration audited reports, legal opinions and underwriter’s opinions during our examination and approval decisions. Secondly, we have paid special attention to the examination of the enterprise, including the enterprise’s business and financial conditions, development prospects, its primary sources of funds for repayment, and the various risks involved. Based on the above, we must further consider enhancing security by the underwriters. Thirdly, we have taken other measures, such as monitoring bank accounts and conducting a site visit of the borrower periodically to ensure the security of the loan.

China IP: Has the bank ever considered the difficulty of repossession if an enterprise fails to repay the loan?

BOB: We have taken into full consideration this problem when we started to develop these products. To avoid any default, we have made an in-depth inspection and analysis of the borrowing enterprise’s sources of funds for payment during our pre-loan investigations, to estimate whether the enterprise’s cash flow is able to satisfy the repayment requirements. On the other hand, we have also continued to monitor and supervise the enterprise during the post-loan administration period, paying close attention to the enterprise’s cash flow and use. We will demand prepayment if any default occurs. In addition, we have enhanced communications with governmental departments to push forward the improvement of the trading platform for intangible assets.

China IP: What do you think of the role the government plays in the services?

BOB: The development of IP pledge loan cannot progress without support from governmental departments, which have thus far been playing a guiding role. Firstly, technology-oriented SMEs are very important in marketing scientific and technological achievements, promoting economic development, and settling employment-related problems. The government’s participation and issuance of policies in support of the development of SMEs will serve as an invisible guide. Secondly, the government’s subsidized loan policies have really lowered financing costs for technology-oriented SMEs and will attract more financial institutions to participate in and support the development of technology-oriented SMEs.

China IP: What is your opinion on the prospects of these IP secured transactions? Why aren’t more banks taking part in this market?

BOB: We anticipate promising prospects for IP secured transactions. With the advancement of our society, and with science and technology playing a more important role in our economic development, there is a lot of room for improvement with these services. However, the full development of these services cannot go further without the improvement of relevant supporting measures and government policy support, such as continuously improving the trading platform of intangible assets and issuing more policies in support of the development of technology-oriented SMEs. Once these supporting measures and policies are in place, we believe more banks will start to launch such services.

China IP: Is there room for improvement for these IP pledge loan services in your view?

BOB: Within the bank, we need to strengthen our training of these services, including the improvement of the basic knowledge for these products, procedures, management measures and other relevant policies. With this, our client managers will be more familiar with the products and understand how they operate.

(Translated by Wang Hongjun)