By  on April 23, 2007

Brands rule and can offer an alternative source for companies to lend against.

"People have seen a lot of fairly high valuations against specific brands, and that has created a marketplace whereby a lot of companies have begun to feel they have equity locked up in their trademarks and in their brands. They'd like to unlock that equity," said Kevin Sullivan, executive vice president, western region manager of Wells Fargo Century.

Lending against trademarks, intellectual property and brands is not new, but it has become more common in the current climate, said Jonathan Lucas, chief sales officer of CIT Commercial Services. "It is much more in vogue today than it was," he said.

Untapped brand equity can be an ace in the hole for apparel companies looking to differentiate themselves from other organizations.

"Typically, we see a gravitation toward buying brands or enhancing brands to look for new ways to separate from the competitors," said Michael Stanley, executive vice president of Rosenthal & Rosenthal.

Factoring firms evaluate loans issued against trademarks and brands by three or four basic criteria, sources said. One important element of decisions about trademarks, according to factors, can be identifiable revenue streams generated by a trademark, such as existing licensing agreements. Identifiable revenue streams are part of establishing a valuation for a trademark or a brand.

Once the value of a brand has been established, a lender is better situated to determine the percentage it will lend against the valuation. The value of intangible assets such as intellectual property can be subjective, making the valuation particularly important, sources said.

With the increased attention brands have been receiving, there are times, however, when that valuation can be more difficult to ascertain. With the rush to brands, sometimes the value of a brand has to be determined before licensing revenue has been established.

"Historically, people looked at brands and said, 'Let's look at cash flow derived from license revenue as a basis for valuing and lending against.' Today, you may have companies with very valuable trademarks but no licensing revenue. You have to consider that the enterprise value of the company is partially in the trademark and have to think about providing undercapitalized companies the money that we would believe we would get back from the total brand if there was a problem," said Andrew Tananbaum, president and chief executive officer of Capital Business Credit.Aside from royalty income streams, companies also look to tap enterprise value and cash generated from the sales of a brand, said Kevin Gillespie, senior vice president, northeast business development manager of CIT Commercial Services.

A factor can be particularly well suited to lending against intellectual property assets, or other intangible assets, because of a willingness to consider more aggressive and less rigid lending arrangements, factors said.

"A factor is typically going to make more sense because their character can be more entrepreneurial," said Sullivan. "Commercial banks do a great job of lending to typically bigger companies, but when you see scenarios where there is a much more aggressive structure, you're typically looking at a factor who can do that type of facility."

There are some additional risks for a financial firm to consider in lending against intellectual property as an asset, said Stanley Officina, president of Ultimate Financial Solutions. It's important that the factor safeguard the loan in the event a company goes bankrupt and trademarked goods need to be sold. In the licensing agreement, the factor's right to collateral is crucial in the event that a company fails, Officina said.

"We're not in the licensing business. You can get into trouble if you forget who and what you are," Officina said.

Generally speaking, making sure the loan is protected is not much different from the preparation that goes into lending against other assets such as receivables, inventory, warehouses, real estate or equipment, sources said. The specifics are different because of the nature of intellectual property assets.

"The risk is more because you are in theory lending against intangible assets which must maintain that intangible value," said Tananbaum.

Despite some additional concerns, the risks are not prohibitive compared with other loans, said Lucas. Most loans of this type are term loans, he said; loans that are payable over a longer period of time, possibly a few years, rather than short-term working capital loans, which are taken out to meet seasonal needs and are then paid back in a shorter time period, say 12 months. Term loans do carry additional risk because it can be much more difficult to predict a company's financial performance over a few years versus 12 months, he said.

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