Debt, Equity or RBF: Advising IP-Rich Clients

The four levers: cost, dilution, control and speed

When an IP-rich client asks how to fund the next phase of growth, the adviser's job is to weigh three routes against four levers. Equity is patient and carries no repayment obligation, but it is the most expensive capital a founder ever sells and it permanently dilutes ownership and control. Debt is cheaper and non-dilutive, but it must be serviced from cash flow and secured against something a lender can realise. Revenue-based finance (RBF) sits between the two: fast and covenant-light, repaid as a percentage of monthly revenue, but priced at a flat fee that can imply a high effective rate for a durable balance.

For a company whose balance sheet is dominated by patents, software, brands and data rather than plant and property, the interesting question is whether IP-backed debt can do the job that founders instinctively reach to equity for. Increasingly it can — but only for the right profile.

Why IP-backed debt fits profitable, cash-generative firms

The defining rule of IP-backed lending is that operating cash flow is the primary source of repayment — the collateral is the secondary, fallback source. A lender does not want to realise a patent portfolio; it wants a loan serviced from the revenue that portfolio underpins. That is why the profile matters so much. NatWest's High Growth IP Loan, the first from a UK high-street bank, advances £250k–£10m at up to roughly 50% of appraised IP value, but treats IP as a fallback behind conventional security and gates on genuine growth (broadly 20% year-on-year turnover growth over three years, minimum £250k turnover). HSBC UK assesses IP within a growth-lending fund of up to £15m per facility.

A cash-generative firm can borrow against its intangibles and keep every share; a loss-making one cannot service the debt and will breach on serviceability regardless of how valuable its IP is. This is the pivot on which the whole advice turns.

Serviceability and clean title decide the fit

Two tests determine whether debt is even available: can the business service it, and can the IP carry a charge.

Serviceability is measured through the debt service coverage ratio — net operating income (or EBITDA less cash taxes) divided by total debt service. Below 1.0 there is a shortfall; lenders commonly want a minimum around 1.20–1.25×. IP-backed facilities are serviced from the revenue or royalties the IP produces, so licensed IP with attributable, contracted income is the preferred collateral. Our serviceability and DSCR reference sets out the accounts pack a lender expects: two to three years of statutory accounts, current management accounts, a forecast with sensitivities and aged debtor and creditor listings.

Clean title decides whether the IP can be taken as security at all. The lender needs unencumbered rights with a documented chain of title — contractor and employee IP must be properly assigned — with renewals paid and encumbrance searches run at both Companies House and the UK IPO. A fixed charge or legal mortgage over the IP must be registered at Companies House within 21 days under s.859A Companies Act 2006 or it is void against a liquidator. The security and charges over IP and due-diligence checklist pages cover the mechanics; IP loan eligibility summarises the client-facing gate.

What the valuation actually measures

For secured lending the valuation is deliberately conservative. Under IVS 210 (Intangible Assets), a valuer selects from income methods — Relief-from-Royalty, Multi-Period Excess Earnings after contributory-asset charges, and With-and-Without — alongside Market and Cost approaches, reconciling discount rates through a weighted average return on assets. These RFR, MPEEM and W&W methods are asset-level IVS 210 techniques for valuing a specific intangible, distinct from IPEV investment-level techniques used to value a whole equity stake. For collateral, RICS guidance directs an orderly-liquidation or forced-sale premise and warns against letting a single "most likely" figure obscure downside, so the report carries ranges and sensitivities. See valuing IP for secured lending for how that premise is applied.

A decision framework advisers can use

Run the client through five questions in order. The first failure points to the route.

Debt vs equity vs RBF at a glance

The sequence is straightforward. Is the business cash-generative with a DSCR comfortably above roughly 1.2×? If not, equity or RBF. Is the IP in force, separately identifiable and free of prior charges? If not, fix title before approaching a lender — our guide to preparing a client covers the remediation. Does the client need to preserve ownership and control? That weights the decision toward debt or RBF over equity. Is speed the binding constraint, or cost? Speed favours RBF; cost and permanence favour IP-backed debt. Finally, is there attributable revenue or royalty income the IP demonstrably underpins? That is the collateral lenders most want to see.

Where the answers point to debt, the deliverable is an assembled evidence pack — register, valuation, tiered evidence, collateral-suitability read, realisation view and financials — that lets a lender diligence quickly. The collateral evidence pack and Lending Readiness Report show what that looks like, and the free Intangible Asset Valuator gives an early view of value. For the client's own reading, point them to the borrower's guide.