Can I Use an SBA Loan to Buy Intellectual Property or Patents?
If you‘re an entrepreneur looking to purchase intellectual property (IP) like patents or trademarks to grow your small business, you may be wondering if Small Business Administration (SBA) loans can help finance that. Let’s break it down so you understand your options.
What are SBA Loans?
The SBA doesn‘t directly loan money to business owners. Instead, it sets guidelines for loans made by banks and other lenders. By guaranteeing a portion of these loans, the SBA reduces the lender’s risk so they’re more likely to approve financing for small businesses.There are several types of SBA loan programs available, with different purposes, terms, and eligibility requirements. Some of the most common types include:
-- 7(a) Loans – The SBA’s primary and most flexible loan program for general business purposes.
- 504 Loans – Provide long-term, fixed-rate financing for major assets like equipment and real estate.
- Microloans – Loans up to $50,000 from non-profit lenders to help startups and businesses in underserved communities. More info here.
So in short, SBA loans help small businesses access funding that they may not qualify for otherwise.
Can SBA Loans Purchase Intellectual Property?
The short answer is yes, 7(a) and 504 loans can generally be used to purchase intellectual property like patents, trademarks, licensing agreements, and other intangible assets. However, there are a few caveats:
- The IP must be valued and able to be collateralized. For patents and trademarks, this means officially registered with the U.S. Patent and Trademark Office (USPTO).
- Lenders usually require a detailed valuation of the IP’s worth from an independent specialist. This helps them assess repayment risk.
- The SBA has limits on the percentage of a loan that can be used for intangible assets without sufficient tangible collateral. Currently this is capped at 50% of the loan amount.
So if you want to buy IP with an SBA loan, you need to have sufficient business assets or revenue to secure the remaining 50% or more of the loan amount.
What About Using an SBA Loan to Pay for Patent Applications?
If you’re hoping to use an SBA loan to cover the costs of applying for new IP protection like patents or trademarks, that becomes a bit trickier.Here’s why:
-- The application and legal fees to obtain patents, trademarks, or licensing agreements are considered “soft costs”. SBA guidelines limit these types of intangible costs to a percentage of the overall loan.
- There’s no guarantee the patent or trademark application will be approved. This makes it riskier for lenders.
That said, you may be able to finance some soft IP costs with an SBA loan if:
- Your business has sufficient hard assets or revenue to meet collateral requirements.
- You clearly demonstrate how securing the IP will increase the business’ worth and improve repayment ability.
- The IP fees make up less than 50% of total loan amount.
So talk with your lender if you want to cover any patent or trademark application costs with an SBA loan. Just recognize there are stricter limits.
Tips for Using an SBA Loan to Buy Intellectual Property
If you want the best shot at getting SBA financing to purchase IP, keep these tips in mind:
🔹 Get the IP valued – Lenders will require an independent valuation report to assess the IP’s worth and repayment risk.
🔹 Have collateral – Plan for at least 50% of the loan to be secured by business equipment, real estate, or other tangible assets.
-🔹 Show increased revenue – Demonstrate how the IP will quickly generate sales and cash flow to repay the loan.
🔹 Check with lenders – Meet with banks or non-bank SBA lenders to discuss your specific IP financing needs.
🔹 Improve your case – The stronger your business and financials already are, the better your odds of approval.At the end of the day, SBA loans are flexible but still debt that must be repaid regardless of how the IP performs. So make sure to put together a realistic plan for how acquiring IP aligns with your business goals and ability to handle the loan payments.
-Common Questions about Using SBA Loans for IP
Here are answers to some frequently asked questions:
**Can I use an SBA loan for licensing or franchising intellectual property?
**Yes, 7(a) and 504 loans can be used for purchasing licensing rights, franchises, patents, trademarks, and other intangible assets. The same requirements around valuation, collateralization, and demonstrating revenue potential apply.
What IP costs can be financed with an SBA microloan? SBA microloans up to $50,000 can cover some licensing or patent fees if this helps your business expand. But the patent itself couldn’t be used as collateral, so microloans may be more practical for trademark costs.
What are SBA express loans? SBA express loans are a type of 7(a) working capital loan with a streamlined process that allows lenders to use their own forms and procedures for faster SBA loan approval. But maximum loan limits and rules around intangible assets still apply.
Can I use equity in my intellectual property for an SBA loan? No, only fixed assets like real estate, equipment, or investment accounts can be used as collateral for SBA loans. The IP itself might be used as collateral once registered, but pending applications cannot.
Are there SBA loans to help me commercialize my patent? The SBA does have some funding programs like Small Business Innovation Research grants that support commercialization. But in terms of loans, even if you already have the patent, you’d still need to meet general 7(a) or 504 loan requirements around repayment ability, collateral, etc.
The Bottom Line
Securing financing to buy intellectual property can be a smart move for small business growth. SBA loan programs definitely allow using funds to purchase registered IP like patents and trademarks under certain conditions. Just be strategic in putting together your request and realistic about taking on debt to build future revenue. Reach out to an SBA lender to discuss your specific situation.