Is IP-backed lending cheaper than raising equity?

Full Explanation

For a founder weighing options, IP-backed lending is usually cheaper than equity in the sense that matters most: it does not dilute your ownership. With debt you pay interest and repay principal over a defined term, then the obligation ends. With equity you sell a permanent share of every future pound the business earns, which for a growing company is typically far more expensive over time than the interest on a loan. This is why intellectual property is increasingly used as non-dilutive funding, letting founders raise growth capital without giving up control. The UK market for this has matured. NatWest's High Growth IP Loan lends £250k–£10m against appraised IP value, HSBC UK evaluates IP within a large growth-lending fund with facilities up to £15m, and specialist and insurance-wrapped lenders such as Aon, Fortress and Brevet operate alongside the banks. Importantly, banks generally treat IP as a fallback form of security behind conventional collateral, and eligibility skews towards high-growth companies — NatWest, for instance, looks for around 20% year-on-year turnover growth over three years or significant recent equity or grant investment. The trade-off is that debt must be serviced whatever the weather, whereas equity carries no repayment obligation. Lenders treat operating cash flow as the primary source of repayment and the IP collateral as the secondary, fallback source; over-reliance on collateral is a recognised underwriting failure. They will test serviceability with a debt service coverage ratio, commonly looking for around 1.20–1.25x as a minimum, and IP-backed loans are best suited where the IP underpins attributable revenue or royalty income that can service the debt. If your cash generation is thin or highly uncertain, equity may be the safer route despite its cost. The sensible next step is to compare the two properly for your own numbers: model the interest cost and covenant headroom of a loan against the value of the equity you would otherwise surrender, and stress-test both against a downside case. An adviser can run this alongside a lending-grade IP valuation so the comparison rests on figures a lender would accept.

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