Q: I have been in business 10 years and recently invented a way to recycle equipment in my industry. I want to sell services using my new invention but I’m having a hard time convincing my banker to loan me working capital because the invention is not on my balance sheet. How can I convince her that this intellectual property is truly an asset?
A: Lenders need historical financial documents, such as profit and loss statements and balance sheets, to assess a borrower’s ability to repay a loan. Your new invention may be worth a lot to you and others in your industry for its ability to gain new sales. However, you wouldn’t really know how much until you sold it. Since you don’t plan to sell, you must approach the question of value according to generally accepted accounting principles. While your certified public accountant is your best resource for applying accounting concepts, you can start the process by figuring out how much you spent on research and development to produce the invention.
Q: How do I do that?
A: The best way to start is to have log sheets that capture the dollars invested in the innovation. Otherwise, go back through your payroll records and talk to employees who worked on the project to assess the value of the labor spent. Then, estimate the cost of parts used and allocate indirect costs. Though you likely expensed these costs on your profit and loss sheet, your accountant can help you assess your “sunk” costs for research and development.
Q: But the sunk cost is a lot less than the revenue this invention produces! How do I value that?
A: One suggested method is to prepare an IP report that gives the reader a narrative of how much value the IP brings to your business, the marginal increase in revenue due to the IP, how the IP helps your position in the market, your strategy for exploiting the IP and how you protect the IP from use by others. An example for preparing an IP report is at the World Intellectual Property Organization website, www.wipo.int/sme/en/documents/ip_accounting.html.
Q: So if I can identify sunk research and development costs and document the value of the IP with an IP report, will the bank give me money?
A: Perhaps. Every bank has standard operating procedures that guide their lending decisions. Providing this information to help them appreciate the value of your IP is a step toward convincing them you are credit worthy. Be sure you have a defensible position by consulting with your CPA and validating the accuracy of your numbers.
Janet Harte is the director and certified business adviser for Washington State University Small Business Development Center for Southwest Washington. The SBDC offers free confidential business management counseling to small and mid-sized businesses. Call 360-260-6372 or e-mail firstname.lastname@example.org.