External Causes of Organization Decline
Many theorists believe that organizational decay is caused by external factors. In fact, some have gone far enough to suggest the various stages in which this decline happens. However, the exact external causes are often difficult to understand. In this article, we will have a look at some of the most prominent causes of organizational […]
Types of Securitizations in Sporting Franchises
Securitization is now becoming an integral part of the way in which international sporting franchises finance themselves. There is no doubt about the fact that securitization is on the rise in the sporting industry in almost every part of the world. This can be easily verified with statistics. However, it needs to be understood that […]
Risks Associated with Sponsorship from Sponsored Entity’s Perspective
In the previous article, we have already seen that sponsorship is not really a risk-free activity. We became aware of the various types of risks which are faced by sponsors when they provide monetary assistance to sporting leagues. However, it is important to realize that the risks are not one-sided. Just like, sponsors are exposed […]
What is the DHFL Scam?
In the recent past, the economy of India has been hit by one corporate marauder after another. It is surprising how the people who are calling the shots in an economy on any given day suddenly disappear from the country and turn rogue. However, this same story has played out in India over and over […]
Financing Your Home
Buying a home is a huge financial decision. The effects of this decision are felt throughout the life of an average person. This is because the average investor does not have the entire cash to buy their home. Hence, they typically pay 25% to 30% of the costs as a down payment. The rest of […]
Business and personal lending is dominated by tangible assets. The simple reason behind this is that they make good collateral. For instance when a person takes a mortgage, they pledge the very home that they buy even though the bank only loans out 80% of the value. Also banks include personal guarantees and ensure that the value of their loans is secured up to 150% of its value.
The same is not the case with intangible assets. Lending against such assets is a recent phenomenon and needs some research and development. In this article, we will learn more about lending against intangible assets.
Intangible assets are the predominant form of assets in the knowledge economy. Just have a look at some of the most valuable companies in the world today. The names that are likely to come to mind are Google, Microsoft, Facebook, Amazon and other such web based companies. Their valuation is upwards of hundreds of billions of dollars! Now, they certainly do not have the tangible assets to justify such valuations. Their offices and all the equipment also tend to be leased! In fact all the tangible assets of such companies amount to less than 10% of their valuation!
The world economy has undergone a change. We are no longer in the industrial era. Instead, we are in the knowledge economy. Herein knowledge assets are much more valuable than tangible assets. This is why the percentage of tangible assets in a company’s valuations have fallen down from 74% in the 1950’s to a mere 13% now.
Given that intangible assets dominate the balance sheets of modern corporations, any banks that lend to such corporations must also be well versed in lending out money to
As mentioned above, intangible assets are the biggest drivers of valuations in the modern world. Both mega corporations and startups have their valuation dependent on these assets. This makes it more important for the banks to create a framework which will allow them to lend against such assets.
At the present moment, all banking rules prohibit the use of such assets as collateral. They are considered to be worth only a fraction of their value when they are collateralized. Unless banks develop a way to loan money against these assets, they are going to lose business to venture capital funds and non banking financial corporations that are allowed to make such loans.
Intellectual assets of all types do not have the same value when it comes to bank lending. Some types of intellectual properties make better collateral than others.
Intangible assets do not have a liquid market. Hence the banks cannot easily recover their money even if they were to get possession of the said intangible asset. Selling this asset would be a huge hurdle. Brand valuations are often notional figures. They signify what the brand is worth to the company that has it now. It does not mean that it would be worth the same amount to another company! Selling intangible asset is a time consuming asset requiring the services of many experts. The business of banks is to lend money. They do not have the knowledge or the ability to liquidate such brands.
Therefore banks usually steer clear of lending against intangible assets. These loans are easy to make but difficult to recover.
One possible ways suggested by banks is to have a third party cover the risks of lending against intangible assets. The main problem is that intangible assets have fluctuating values. Therefore banks cannot lend against them.
If there were a third party that promised to compensate the bank with a fixed amount in the event of a default, banks would be willing to buy such a product. In return, the banks can offer the brand as collateral to this third party.
The third party will then sell the assets in the market. If they sell it for more than they brought it from the bank for, they make a profit, if not they make a loss!
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