INTM518080 | Thin capitalisation: practical guidance: lending against asset values: lending against intangible assets

Assets such as goodwill, brand names, patents and scientific know-how are referred to as intangible assets. Generally, these assets only have value to someone who has the ability to exploit them, and third party lenders are unlikely to be in a position to do that. It is possible that a patent, for example, may have some resale value if taken over by a lender when a loan defaults, but putting a value on it at the start of the loan is difficult, especially if at that point the patent is not being commercially exploited. UK lenders generally are not prepared to take such risks, and so are unlikely to lend against intangible assets.

The value of a successful intangible should manifest itself by producing profit and cash flow for its owner. However, in the event of a default, it is likely the borrower is in financial difficulty which means any intangibles held as security may have little value. In particular, goodwill does not offer much balance sheet security, because once a company is in decline its goodwill will be becoming worthless.