March 03, 2021
IP Finance Transactions of South Korea Surpass KRW 2 Trillion
- Creating a window for financing innovative SMEs and venture enterprises -
The total IP finance market in South Korea surpassed KRW 2 trillion for the first time by 2020. IP finance refers to financing activities based on intellectual property (IP) as intangible assets. In other words, financial institutions provide funds to companies based on the value of the company’s IP assets in the form of loans collateralized by IP, loans guaranteed by IP and IP-based investments.
KIPO Commissioner Yong-Rae Kim announced that soon after reaching KRW 1 trillion in 2019, the scale of South Korea’s IP-backed financing rapidly increased by 52.8% to record KRW 2.64 trillion in 2020. Specifically, the total amount of loans using IP as collateral was KRW 1.93 trillion, the total amount of loans based on guarantees issued on IP was KRW 708.9 billion, and the amount of investments on companies with IP assets and direct investment on the IP itself was KRW 262.1 billion.
The expansion of IP financing has also contributed to supporting Korean SMEs overcome financial difficulties due to the COVID-19 outbreak. In particular, support was focused on IP-based innovative companies regardless of having insufficient tangible collateral and/or low credit rating for securing conventional loans.
Upon survey of 1,608 companies that received loans collateralized by IP in 2020, the results showed 74.4% (1,197 companies) had low credit ratings (BB credit rating or below). While credit loans for SMEs can average a 3-4% interest rate, SMEs were less burdened by the *2% interest rate for loans based on IP assets.
* 2020 Survey on the Effect of Special Interest Rates for Loans Collateralized by IP (Response by 626 companies, Dec. 2020)
The year-on-year amount of loans collateralized by IP increased by 2.5 times and surpassed the total of KRW 1 trillion. This was in part due to the active participation of private banks. Fund form private banks constituted 68.5% (KRW 748.3 billion) of the total amount. Particularly, the Industrial Bank of Korea, Woori Bank, and Shinhan Bank greatly expanded their IP backed loan services for patent rich companies. And SMEs, which were on the verge of abandoning patent commercialization due to lack of funding, were able to successfully overcome the crisis through IP finance.
In one case, an SME needed funds to conduct clinical tests to develop a COVID-19 vaccine but had already reached its maximum credit line. The company was able to use seven of their patents on “genetic scissors” as collateral to successfully receive a KRW 2 billion loan and was able to continue vaccine development.
While the year-on-year amount of loans guaranteed by IP showed a slight decrease, it is expected to recover to its former level in 2021 as IP based guarantees will continue to be issued through guarantee institutions.
* The volume of loans guaranteed by IP (KRW 100 million): 7,240 (2019) → 7,089 (2020, reduced by 2.1% year-on-year)
Meanwhile, guarantees through the use of the online patent evaluation system* reached KRW 250 billion, which is a 44.5% increase from the previous year. This substantial increase indicates a growing demand for timely evaluation in order to quickly secure funds.
* The Korea Credit Guarantee Fund (KODIT) and the Seoul Credit Guarantee Foundation is currently expanding its “IP smart guarantees” based on the SMART3 grade evaluation system; the SMART3 evaluation calculates grades in real-time.
* The Korea Technology Finance Corporation (KIBO) operates its “IP fast guarantees” based on the KIBO Patent Appraisal System II (KPAS II); the KPAS II evaluation process takes about one week.
Therefore, when a startup company that develops online advertisement platforms was unable to secure operational funds from financial institutions as due to lack of sales, they were able successfully secure a bank loan based on an IP guarantee issued through the online appraisal by KIBO.
The amount of yearly IP investment showed a 35.6% (KRW 68.8 billion) increase compared to the previous year and recorded KRW 262.1 billion in yearly IP investment. This is due to the implementation of a policy for IP finance investment vitalization announced on July 2020 and the enhanced awareness of IP investment by private investment institutions.
In addition, the amount of direct investments into promising patent technologies quadrupled from the amount of the previous year and recorded KRW 46.2 billion.
There were even instances where SMEs are able to attract enough IP investments to successfully localize materials and products and grow into a global enterprise. For example, in 2013 an SME that produced LED and semiconductor materials received a KRW 1.6 billion investment from a patent account subsidiary cooperative based on their material-related patent value and successfully localized their materials. By 2020, it was recognized as the No. 1 company in the global solar battery material (TMA).
Director General Ho-Hyeong Park of the Intellectual Property Policy Bureau at KIPO remarked, “Seeing that we have entered into the growth phase of IP financing, it will be important to have natural growth within the financial market.” He also added, “Accordingly, KIPO will spare no resources in the effort to vitalize financial support for innovative enterprises such as by working to provide high-quality IP evaluation services.”