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The Organisation for Economic Co-operation and Development (OECD) has just published a new report, ‘Secured lending for SMEs: making effective use of registries and intangibles’, co-authored by Inngot CEO Martin Brassell and Kris Boschmans, formerly with the OECD, now with the European Future Innovation System (EFIS) Centre.
The report explores ways countries could improve access to finance for SMEs, and in particular looks at the issue of intellectual property and intangible assets, which fall under the heading of ‘moveable assets’.
The authors identify two interrelated aspects of leveraging movable assets to facilitate access to finance. First, the implementation of collateral registries for movable assets; and second, the collateralisation of intangible movable assets. Both dimensions are supported through a case study approach.
The report can be downloaded for free from the OECD iLibrary – https://bit.ly/3o0yqnS
The authors point out that bank lending represents the main source of external finance for many SMEs across the globe. Often, such bank loans to SMEs require collateral to be pledged (in which case the ownership of the asset remains with the borrower unless a default takes place) or, alternatively, in the case of asset-based lending, that the underlying asset is owned by the financier.
In both cases, secured lending activities are underpinned by collateral registries (to register the financial interest of the assets as part of a secured lending transaction) and legal frameworks (for example to determine ownership in case of disputes or how to transfer ownership in case of default). Reliable registries and a well-functioning framework allow a broad range of assets to be secured at low costs, and are therefore essential for SME credit markets to flourish.
The report particularly examines arguments for the creation of specialist registries for specific asset classes, such as movable assets. The creation of specialist registries would make it easier for these assets to be leveraged to secure lending, but may require a different form and legal status than more general registries and lead to a risk of multiple registrations and hence ambiguity. Intangible assets, in particular, pose a challenge in this area.
Yet intangible assets now make up large proportion of corporate value and investment, and this asset class is recognised as an important driver of productivity. At the same time, their use for secured lending transactions remains limited. Nonetheless, there are ways to leverage intangible assets as security, depending on the characteristics of the asset.
While many countries have developed policies that would enable more assets (including intangibles) to be secured, in particular through credit guarantee schemes, some jurisdictions have gone further and developed specific policies for intangibles assets in secured lending. The paper discusses detailed case studies in this area from Canada, China, Korea, Singapore and the United States.
The authors examine how these different approaches function and highlight the opportunities and challenges for making better use of them. They also outline the role that policies can play in this regard.
This is the second report for the OECD that Martin Brassell and Kris Boschmans have co-authored. The first, Fostering the Use of Intangibles to Strengthen SME Access to Finance, was published in January 2019.
