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R&D Financing 101: SR&ED Bridge Loans and SR&ED Credits Factoring
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South Sheridan Executive Centre
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Oakville, Ontario
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INTRODUCTION - SR&ED FUNDING
How can SR&ED Bridge Loans and SRED Factoring transform the way businesses fund their R&D initiatives, potentially accelerating technological advancements and fostering innovation in various industries?
SRED Credits in Canada can be monetized. Simple as that. It's done via a SR ED (SR&ED) bridge loan, in effect a factoring or discounting of your SR&ED tax credit. We hear the term 'monetization' a lot these days; it comes down to simply meaning 'converting a debt into currency'.
In the world of research and development (R&D) financing, SR&ED Bridge Loans and SR&ED Credits Factoring stand as innovative solutions that empower businesses to bridge financial gaps and unlock the value of their scientific research investments
That debt of course is in fact the debt of the federal and provincial government via the refundable tax credits they owe your firm for your R&D projects for the current fiscal year.
THE ROLE OF THE SR&ED CONSULTANT IN PREPARING YOUR CLAIM IS KEY TO SUCCESS
Those claims are sometimes prepared by your own firm based on your expertise in the area, but 99% of the time they are prepared by a SR & ED consultant; someone who specializes in the 'nuances' of research and development claims. Some of these consultants are accountants, some have worked for CRA previously and know the program, and others simply have industry expertise and know what they are doing!
A key point to be made around the type of consultant that prepares you claim that it often plays a factor in the ability to get your claim financed under the sr ed program. That’s because the consultants typically work on contingency, so the importance of presenting a quality sr ed claim can’t be overestimated.
HOW MUCH MONEY DOES THE GOVERNMENT PAY UNDER THE PROGRAM
In 2022 close to 3 Billion dollars was ' doled out ' under the program and the majority of these claims were prepared by the consultants we have mentioned.
IS YOUR SR&ED CLAIM VALID?
When a tax credit is financed or monetized /factored into a bridge loan there is of course no 100% assurance the claim will be approved, and that is why the quality and reputation of the consultant often help to get your claim approved and financed quickly. It's all about ' the expert'!
Never has a program come under more scrutiny than in the past year, when the Scientific Research / Experimental Development (aka ' SRED') seemed to be in the news all the time.
The dust has finally settled and many things changed, but one thing did not - SR ED financing is alive and well. Even more innovative solutions are on the buffet table for you to choose from when it comes to monetizing and cash-flowing that claim.
HOW DOES THE ACTUAL SR&ED FINANCING WORK?
The standard R&D claim financing has typically been as follows - funds are advanced to your firm for up to 70% of the total of the federal and provincial claims via an up front cash advance - thereby aiding in your overall cash management.
That financing becomes a bridge loan with no payments made by yourself for the life of the loan, (financing coss accrue ) which is typically a few months up to a year depending upon several timing factors, whether you're a 'first timer', etc. SR&ED loans are not a debt financing vehicle, you are simply cash flowing your claim to eliminate the waiting period.
The balance of the funds is remitted to your firm when the government pays the claim, less the financing costs. And the good news - no payments are made during the loan, it’s financing that has one balloon payment that in effect closes the transaction. In a way its a form of ' factoring ' your receivable, the sr&ed tax credit itself!
WHAT NEW IN SR&ED LOANS? QUITE A BIT! HOW ABOUT A SRED LINE OF CREDIT ?!
So what's new in SR ED financing and your sr ed claims? A fair bit actually. If your firm qualifies you are eligible for SR ED accrual financing, allowing you to monetize next year's claim today as you spend. Even a formal SRED operating credit line can be set up outside your other business financing commitments, allowing you to draw down on funds as you require based on your R&D tax credits.
Cross-Industry Collaboration
Uncommonly, SR&ED financing can be seen as a catalyst for cross-industry collaboration. Businesses from different sectors can pool their SR&ED tax credits and jointly fund groundbreaking research projects. This approach fosters knowledge exchange, synergy, and innovative breakthroughs that may not have been possible within individual industries.
Rural and Remote Development
Often overlooked, SR&ED financing can play a crucial role in promoting research and development in rural and remote areas. By encouraging businesses to establish R&D hubs in less urbanized regions, these financing options can stimulate local economies, create jobs, and support innovation where it is needed most, potentially reducing urban concentration and benefiting underserved communities.
KEY TAKEAWAYS
SR&ED stands for the Scientific Research and Experimental Development Program, which is a Canadian tax incentive program encouraging innovation. Bridge Loans, short-term financing, support R&D projects. SR&ED Credits Factoring involves financing tax credits to access cash flow. Eligibility criteria, project documentation, and compliance are crucial. Understanding the financial benefits and risks is vital for businesses.
CONCLUSION - LEVERAGING SR&ED REFUNDS
So while the pundits, economists, and lobbyists around this tax credit program continue to talk about the merits and future of the program remember that savvy business owners of Canadian firms and their managers continue to every day enter into SRED bridge loans via sred financing to help them with their working capital and cash flow needs in today’s ultra-competitive environment.
Call 7 Park Avenue Financial, to a trusted, credible and experienced SR&ED Loan advisor to discuss your needs around sr ed financing solutions.
FAQ
What is SR&ED financing, and how can it benefit my business?
SR&ED financing, including Bridge Loans and credit factoring, provides funds for research and development projects, helping businesses innovate and grow while optimizing cash flow via the funding of sr&ed credits via short term bridge loans with the refundable tax credit as the collateral for the loan
How do SR&ED Bridge Loans work, and when should I consider them?
SR&ED Bridge Loans offer short-term financing to cover R&D project expenses before receiving tax credits. Consider them when you need immediate funds to advance your research initiatives in furthered technical knowledge
What is SR&ED Credits Factoring, and how can it improve cash flow?
SR&ED Credits Factoring for Canadian businesses involves the financing of your tax credits to obtain immediate cash flow. It's a strategic option to access capital without waiting for government reimbursement.
Are there eligibility criteria for SR&ED financing, and how can I ensure compliance?
Yes, eligibility criteria exist, including having eligible R&D activities and proper documentation. Ensure compliance by maintaining accurate records around sr&ed projects focused on scientific of technological uncertainty.
What are the financial risks associated with SR&ED financing, and how can I mitigate them?
Financial risks for Canadian controlled private corporations engaged in R&D may include interest costs and credit factoring fees. To mitigate them, carefully assess your project's financial needs and choose the right financing option.
What industries can benefit from SR&ED financing?
SR&ED financing applies to various industries, including technology, manufacturing, healthcare, and more, as long as they engage in eligible R&D activities around their technical challenges
Can I use SR&ED credits for any business expenses?
SR&ED credits are intended for qualifying R&D expenses. They cannot be used for general business operating costs or non-R&D activities.
Are there government grants or incentives related to SR&ED financing?
While SR&ED credits are a significant incentive, some provinces in Canada offer additional grants and incentives for research and development projects.
How can I determine if my R&D activities qualify for SR&ED credits?
To determine eligibility, consult the Canada Revenue Agency guidelines and consider seeking expert advice to assess your specific R&D projects from a SR ED Tax Credit Consultant who is familiar with your industry or sr ed project
Are there specific repayment terms for SR&ED Bridge Loans?
Repayment terms for Bridge Loans vary among lenders. Typically, they are short-term loans, but terms can be customized based on your needs and circumstances around your sr ed refund.
Can I combine SR&ED financing with other types of business financing?
Yes, Canadian companies can combine SR&ED financing with other funding sources to meet your overall financial needs while optimizing your R&D budget for the sr ed investment tax credit program
