The IP Collateral Due-Diligence Checklist

What IP collateral due diligence is actually testing

IP collateral due diligence exists to answer one question a credit committee will always ask: if this loan defaults, can the security be realised, and for how much? Intangible assets do not behave like plant, receivables or property, so the diligence pathway is different. A patent portfolio can be commercially dominant and still be worthless as collateral if title is defective, a renewal has lapsed, or a prior charge already sits over it.

The exercise breaks into six workstreams: title and chain of title; encumbrance and prior-charge searches; an independent IP audit; renewals in force; an IVS-aligned valuation on a liquidation premise; and serviceability. Each feeds the next, and a failure at any stage caps — or kills — the advance. What follows is the checklist a lender runs, in the order a field examination tends to run it.

1. Title and chain of title

The first test is ownership. The borrower must hold clean, unencumbered legal title to every asset offered as security, evidenced by a documented chain from creation to the present entity. This is where most weaknesses surface. Contractor-developed code, founder IP, and employee inventions must all be properly assigned to the borrowing company — an unsigned assignment or an IP-holding subsidiary outside the security net can break the chain entirely.

Registered rights (patents, registered trade marks and designs) carry more weight than unregistered rights because their ownership and status are matters of public record. A lender will map each asset to a named legal owner and confirm the borrowing entity is that owner. The collateral evidence pack should already contain the assignments; diligence verifies them rather than discovering them.

2. Encumbrance and prior-charge searches

Next, the credit team searches for existing security. Two registers matter, and both must be checked:

• Companies House — for charges registered against the borrower under the Companies Act 2006. A prior fixed or floating charge that captures the IP ranks ahead of any new security.
• The UK IPO — where security interests over patents, trade marks and registered designs are recorded against the right itself.

Any new security must itself be registered at Companies House within 21 days under section 859A of the Companies Act 2006, or it is void against a liquidator or administrator, and also recorded at the UK IPO. The mechanics of perfecting and prioritising that security are covered in security and charges over IP; diligence confirms the borrower's IP is free of prior claims before the new charge is taken.

3. Independent IP audit and renewals in force

An independent IP audit tests that the rights exist, are valid, and are maintained. The single most common failure here is a lapsed renewal — an unpaid patent or trade mark renewal fee can extinguish a right the whole loan was premised on. The audit confirms every asset in the security pool is in force, with renewals paid and deadlines diarised for the life of the facility.

The audit also grades the strength of the evidence behind each asset — ownership, protection, use and commercial traction. An assembled collateral-and-evidence assessment that grades this from L0 to L4 lets a credit team see, at a glance, which assets are bank-ready and which are not.

4. Valuation on a liquidation premise

Only once title, encumbrances and validity are clean does valuation add real value. For secured lending the premise is not fair value in a going concern — it is what the asset would fetch in an orderly or forced disposal if the borrower failed. The reference frameworks are IVS 210 (Intangible Assets), RICS guidance on the valuation of IP rights, and Red Book VPGA 6; the 2025 IVS edition renumbers reporting to IVS 106 and bases of value to IVS 102.

Approaches span income, market and cost. The income methods — Relief-from-Royalty (RFR), Multi-Period Excess Earnings (MPEEM) after contributory-asset charges, and With-and-Without (W&W) — are asset-level IVS 210 techniques and should not be confused with IPEV investment-level methods used to value a whole company or fund holding. Cost, market comparables and DCF round out the toolkit. Inputs are deliberately conservative for lending: a low-end royalty rate, a risk-premium discount rate reconciled via a weighted average return on assets, a finite economic life, and a cautious terminal value. A report must not let a single "most likely" figure obscure the downside — sensitivity analysis and ranges are expected.

The security value is a weighted blend of three lender tests — separability (can the asset be sold apart from the business?), saleability (is there a realistic buyer?) and legal strength (does title and protection survive scrutiny?) — applied to that orderly-disposal value. That blended figure, not the going-concern number, sets the loan-to-value. Licensed IP with attributable royalty income scores highest because it is both separable and self-servicing.

The six-stage diligence checklist

5. Serviceability and the field examination

Collateral is the fallback; the loan is repaid from cash. Lenders want two to three years of statutory accounts, current management accounts (P&L, balance sheet and cash flow), a forecast, and aged debtor and creditor listings — with IP-backed facilities adding around three years of projections plus sensitivity. The serviceability test turns on the debt service coverage ratio: net operating income (or EBITDA less cash taxes) divided by total debt service. Below 1.0 is a shortfall; a minimum around 1.20–1.25× is common.

The field examination, or collateral audit, is where a credit team tests the borrower's own figures rather than accepting them — reconciling the register to the accounts, confirming renewals, and estimating realisable value before drawdown. It mirrors the borrowing-base discipline of asset-based lending, where eligible collateral times an advance rate, less ineligibles and reserves, gives availability. IP typically sits as a marginal top-up on a mainstream ABL line; the borrowing base for intangibles explains where it fits and where it does not.

A borrower who has assembled the register, valuation, graded evidence and financials in advance shortens this process considerably. The free Intangible Asset Valuator produces a structured starting point; advisers preparing a facility can work through preparing a client for an IP-backed loan to arrive at diligence with the pack already built.