The intellectual property pledge loan is, from the beginning, a financial product born with a mission — to solve the fund raising difficulties of small to medium sized enterprises (SMEs), especially those in hi-tech areas. Many interviewees, however, told us that such companies have a highly diversified need for money.

Wang Xizhang, executive deputy manager of Beijing Gingko Group, which once received a 10 million Yuan loan through a secured loan against intellectual property, believes that many problems still exist in the business — value is hard to be cashed, evaluation is difficult, there are too many middle men, and the cost is too high. More importantly, for his medium-sized company which borrowed a loan of 150 million Yuan in 2008, a 10 million Yuan loan does not help much. The Bank of Communications, the first bank to provide the service, also noticed this and planned to target smaller companies in 2009.

Of course, businesses that benefit from these IP secured transactions welcome them, and, in their eyes, it not only is a solution to their financial problems, but also carries some special meaning.

At the end of 2007, Beijing Competitor Sport Technology Joint Stock Co., Ltd., a producer of sport nutrition products, obtained a 10 million Yuan loan from the Bank of Communications. The loan is special because it is not based on “tangible” assets, but instead is secured by its trademark (the Chinese equivalent of the term “Competitor”) and some patents.

Receiving 10 million Yuan from a bank based on a trademark and patents does not sound like hitting the jackpot for Competitor’s chairman Bai Houzeng. “These things are priceless to me,” he said, “and indeed given that these are my most valuable possessions. 10 million is way below its value.”

Competitor’s loan is part of “Zhanyetong”, a financial product from the Bank of Communications that provides loans to SME secured by intellectual property.

Business future against money reality

At the end of 1998, Bai, who had been selling beverages in a state-owned enterprise, set up Beijing Competitor Sport Technology Joint Stock Co., Ltd., and started to produce sport nutrition products. Market prospects were quite good for the new company along with the advancement of the Chinese economy.

 “We opened the new trade with some other early enterprises and I believed deeply in its potential; I really hoped to turn Competitor into a century-old brand,” said Bai.

“From 1998 to 2000, Competitor’s sales doubled, and redoubled, and reached 1 million Yuan. However, at the same time, many other people began to enter this trade.” Competitor was eager to grow its business, but was bogged down by tight cash flow. At that time, even the expenditure of 2000 Yuan needed to be discussed by management to make sure it was absolutely necessary.

Bai approached a bank in early 2000 and tried to convince them to approve a 1 million Yuan loan agreement, but ended up empty-handed by year’s end.

“I visited the bank so often that I became one of them. However, a year’s worth of effort yielded nothing and I was deeply frustrated. I half-joked with them: as a company officer, my job should be to promote sales rather than just talking about loans. If I spent that much time promoting sales, I could have paid everything off. They also laughed, but still would not give me the money.” The situation lasted until 2004, when Competitor finally managed to obtain a 2 million Yuan loan from the Shanghai Pudong Development Bank.

The loan was difficult to obtain because Competitor — a business focusing on research and innovations -- had no real assets secure a loan. In 2001, Competitor rented a garage as its workshop and, in 2002, rented space from a boiler plant. Bai only had his personal credit and his confidence in the trade to persuade the bank. He even said to the bank: “I only ask for 500,000 Yuan, and I will keep the money here without touching it. After we have established cooperative relations you can visit our company and have a taste of the trade and our credibility.” Despite this, Competitor still failed to convince the bank because the company had neither a building nor land.

“I can understand the bank, and if I were them I might have done the same. However, I hope society would have another way to measure and trust high-tech enterprises of medium and small businesses,” said Bai.

 “Treasures” pledged

At the end of 2007, Bai came across a new idea at a government promotion: financing by using an intellectual property pledge, and the “Zhanyetong” service offered by the Bank of Communications, which provides loans to hi-tech SMEs through loans secured against patents and trademarks.

“At first I was not interested in the service, and I even felt that the Bank was just selling its product here. The reason is simple: trademark and patents are our lifelines, and they are much more valuable than buildings and land. A building can always be bought, but we would be left with nothing if our trademark or patents were sold. My career is too important for me to allow them to take away my trademark and patents. I would rather let them take my house, if anything.”

However, under the recommendation of Beijing Municipal Science & Technology Commission, Competitor finally tried the new service. In November 2007, it applied to the Bank for “Zhanyetong”, the pledge being the “Competitor” trademark and a few patents. In the month that followed, Competitor’s finance department saw every day intermediary agencies (evaluation institutions, law firms) which came to assess the value and legal status of the pledge. The final result was that Competitor’s trademark and patents were worth 50 million Yuan, but the Bank’s loan rate was only 20% so Competitor only got a one-year loan of 10 million Yuan. Upon signing the contract Bai joked, “This is the most valuable thing of our companies. Why did you give such a low assessment?”

The 10 million Yuan loan, which was part of the 30 million Yuan in financing that Competitor acquired in 2007, came just in time and was used on R&D and equipment renovation in 2008. At the end of that year, Competitor paid the loan back two months ahead of schedule and further applied for an additional 7.5 million Yuan loan. Bai said he would continue to use the bank’s service.

Looking back, Bai laughed: “I feel their service is just like our company: not understood at the beginning, but was accepted gradually.”

 “Intangible” value behind intellectual property pledge loan

The government played an important role in Competitor’s loan-application efforts, not only in the promotion of the bank service, but also with the government’s interest discount policy.

When speaking about government support, Bai wishes that it will become a common practice. He believes that the loan first serves to share risks faced by enterprises like his.

 “There are many  small and medium-sized hi-tech corporations like mine. When attending some forums, I felt that many once unimaginable things have already been invented and the inventors look at this as a career,” Bai said. “However, money is needed for such innovations to turn them into products, and society, while enjoying the fruits of innovations, should also share some risks in the course of innovation. So I believe such a loan is an opportunity to encourage such corporations. I felt encouraged when they say our trademark is worth several million Yuan.”

“Creditability is the key in secured transactions, and without it even tangible assets can be forged. For our high-tech corporation, a bank will not give us money based upon empty promises. Now our trademark and patents are our credit guarantee to the bank. So I hope that loans secured against intellectual property can become a common practice,” said Bai.

(Translated by Li Heng)