SR&ED factoring, or in effect the financing of your Canadian SR&ED refund claim, is a unique and innovative method of financing your tax credit.
For many Canadian business owners and financial managers, their company's amount invested in the research and development of innovative products and services represents a significant portion of their budgets.
What is SR&ED Financing?
Many Canadian companies and their business owners participating in the SR&ED program are not aware that they have the ability to finance their claims due from Canada Revenue Agency.
The SR&ED tax credit is a refundable tax credit and often appears as an intangible asset on a company's balance sheet and is shown as an account receivable of the business.
The majority of traditional financial institutions do not have the understanding to place a financeable value on refunds. When we meet with customers who wish to finance, aka "factor" their SR&ED claim, it's all about timing—they want the immediate benefit of that cash flow and working capital back into their firm.
The term "non-dilutive capital" is often used in the SR&ED terminology—simply meaning that firms financing their SR&ED claims have a new level of flexibility which in many cases removes the necessity to consider new equity financing.
The ability to now plan cash injections around their work in SR&ED tax credits can impact various sales and marketing initiatives positively, leading to higher valuations.
The financing of the SR&ED investment tax credit claim is the way to do that—it's a case of immediately receiving the cash refund for your SR&ED tax incentives instead of having to wait anywhere from several months to a year to get the refund.
And if your firm is filing an SR&ED claim for the allowable period of two years prior, well, that cash flow and working capital have now doubled and provided a significant amount of cash flow if you finance the claim today.
As we have stated, the whole scenario of financing an SR&ED tax credit is essentially the process of factoring or "discounting the claim." We would point out that the whole process is applicable to film tax credits also, which is a growing and robust industry given that the government has heightened its grants in many areas of film tax credit financing.
So What's Involved in Monetizing Your SR&ED Claim?
And perhaps as important, what amount of funds can you get today for the claim?
We have stated the claim is discounted or factored—businesses factor because they need immediate access to cash when current assets such as accounts receivable cannot provide cash flow in a manner that allows your firm to have the working capital it needs.
In some cases, the factoring of receivables or an SR&ED claim may be one option for cash flow generation; however, in a great deal of cases, it is, in fact, the only option.
That is because Canadian banks are reluctant to finance SR&ED claims because of the partial uncertainty in the final approval of the claim. The reality is that many Canadian small and medium companies are currently challenged in obtaining all the business financing they need.
How Much Can I Get Against My SR&ED as Collateral?
This is the typical question asked by Canadian businesses when financing their SR&ED claim.
The answer is typically 75% now. Generally, financing is structured along the lines of no principal or interest payments on the SR&ED loan financing until the government approves and funds the claim.
At that point, your firm gets the additional 25% of the claim, less the financing costs associated with the claim, which vary based on the size of the claim, the overall financial situation of your firm, etc.
Who Qualifies for SR&ED Financing?
We want to clearly point out that no company should be deterred from financing a claim because they are in a pre-revenue stage or have other financial problems or challenges, as the essential security of your SR&ED itself is the prime collateral for the financing.
The use of a qualified SR&ED consultant always helps the financeability of your claim.
Case Study
A Canadian tech firmfaced a critical decision: lay off their development team or find immediate funding to bridge an 8-month gap before their $750,000 SR&ED refund arrived. With monthly expenses of $85,000 and only 6 weeks of runway remaining, traditional banks declined their loan applications due to limited revenue history.
Through 7 Park Avenue Financial's SR&ED factoring program, the company accessed $562,500 (75% of their claim) within 18 days. This immediate capital allowed them to:
-
Retain their entire 12-person R&D team
-
Complete two critical product development phases
-
Secure a major client contract worth $1.2 million
-
Position for Series A funding six months later
-
The factoring cost was offset by the $1.2 million contract they would have lost without their development team. More importantly, maintaining momentum allowed the company to complete their next innovation cycle and file an additional $980,000 SR&ED claim the following year.
Conclusion
Every business participating in qualifying for SR&ED credits should investigate the option of leveraging their claim into positive cash flow into the business.
That cash advance against an already filed SR&ED or funding for accrued spending prior to filing does one thing—it accelerates the growth of your business.
While SR&ED finance solutions are typically a bridge loan against a filed SR&ED claim, borrowers can now fund their accrued spending prior to filing.
The time-worn saying that cash is king is so very applicable to the SR&ED process, allowing a company to factor their SR&ED claim or fund accrued work at financing costs that make sense for their SR&ED project.
Talk to 7 Park Avenue Financial, an expert in SRED financing, and determine if you're a strong candidate for immediate cash flow and working capital via this great Canadian government program. If your business is SR&ED eligible, talk to our team about financing your claim.
FAQ: Frequently Asked Questions
What is the SR&ED Program?
The Scientific Research and Experimental Development program in Canada is a refundable investment tax credit incentive under the Income Tax Act, via CRA, that helps businesses engaged in R&D for scientific or technological advancement or new processes. It is by far the largest business incentive program in Canada, providing in excess of $3 billion annually to allow businesses to offset their research and development costs. Both startup and mature companies conduct research and use the program on an annual basis, as claims are filed annually every tax fiscal year.
Citations / More Information
- Canada Revenue Agency. (2024). "Scientific Research and Experimental Development (SR&ED) Investment Tax Credit Program." Government of Canada. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-programme.html
- Innovation, Science and Economic Development Canada. (2024). "Bioscience and Clean Technology." Government of Canada. https://www.ic.gc.ca/eic/site/icgc.nsf/eng/home
- Canadian Federation of Independent Business. (2024). "Small Business Financing Report." CFIB. https://www.cfib-fcei.ca
- Statistics Canada. (2024). "Business Enterprise Research and Development." Government of Canada. https://www.statcan.gc.ca
- BDC (Business Development Bank of Canada). (2024). "Alternative Financing Solutions for SMEs." BDC Capital. https://www.bdc.ca
