"SMEs Struggling with Funding for Technology Development... Banks Should Provide Loans Secured by Intellectual Property"

Minister Kwon Chil-seung of the Ministry of SMEs and Startups attended the '2022 AmCham SME Win-Win Cooperation Forum' held on the 20th at Andaz Seoul Gangnam in Gangnam-gu, Seoul, and toured the domestic SME promotional booths. Photo by Kang Jin-hyung aymsdream@

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[Asia Economy Reporter Sim Nayoung] It has been found that small and medium-sized enterprises (SMEs) that devote themselves to research and development (R&D) require significantly more funding but find it difficult to obtain loans from banks. This is due to their lack of physical collateral capabilities such as land or buildings. There is a suggestion that banks should take measures to increase loans secured by intellectual property to support the funding of such companies.

On the 12th, the Korea Institute of Finance released a report titled "The Importance of R&D and Intellectual Property Finance for Innovative SMEs," stating that "R&D-intensive companies face financial difficulties due to high financial demand but insufficient physical collateral capabilities." The report investigated companies listed on the KOSPI and KOSDAQ as of the end of 2020, focusing on those that invested more than 10% of their sales in R&D. There were 206 R&D-intensive companies, mainly distributed in industries with high growth potential such as semiconductors, electronics, electrical, medical, petroleum, chemical, and pharmaceuticals.

"From 2011 to 2020, the average sales growth rate of R&D-intensive companies and non-intensive companies was 59% and 27%, respectively," the report explained, "showing that the growth potential of intensive companies is much higher."

Funding demand was much higher for intensive companies. Examining the ratio of R&D investment to sales, intensive companies showed 405%, while non-intensive companies were below 2%, a difference so large that comparison is impossible. Considering that profits generated from sales are one of the important funding sources for R&D investment, it can be inferred that intensive companies have a greater demand for financial services, including loans, to raise investment funds compared to non-intensive companies.

Despite this situation, intensive companies have lower physical collateral capabilities for loans compared to non-intensive companies. The ratio of land and buildings to total assets was higher in non-intensive companies (19.4%) than in intensive companies (17.1%). The report stated, "The lack of collateral capability relative to the high financial demand of intensive companies can act as a cause of financial difficulties," and added, "Among the 206 intensive companies, 181 companies, accounting for 88%, have total assets under 500 billion KRW, suggesting that financial difficulties for intensive companies are likely more severe."

The report concludes that banks should introduce financial products utilizing intellectual property acquired through R&D for SMEs investing in technology development. It suggested methods such as providing loans secured by intellectual property obtained through R&D or securitizing patent royalty income to offer it to the capital market and raise funds from investors.

The report noted, "From 2016 to 2021, the supply scale of intellectual property finance (secured loans + guaranteed loans + investments) in South Korea increased from 577 billion KRW to 2.504 trillion KRW. However, considering that the total R&D investment of all listed companies in South Korea reached 43 trillion KRW in 2020, the supply scale is insufficient," and proposed, "The proportion of investment within intellectual property finance averages 17%, and this needs to be increased."

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