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Innovate with Confidence: How SRED Funding and Tax Credit Financing Can Fuel Your R&D Activities
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SRED Finance 101: Understanding Tax Credit Financing for Canada's SR&ED Program
INTRODUCTION - WHAT IS SR&ED /SRED FINANCING
SRED Financing allows firms with an r&d program to connect today to the cash flow sred refund they were waiting for - it's as simple as that.
Canadian business owners who focus on r&d should be familiar with Canada's SR&ED program for innovative companies, providing valuable federal tax incentives for what is termed under the program's scientific research and experimental development - The ability to access financing for a claim is known as sr&ed tax credit financing and can help a business grow and further innovate. It's important to understand how sred financing works, what are the key benefits, and how the financing process works - spoiler alert - it's easier than you think!
Monetizing that refundable sr ed tax credit is, via a SR&ED loan, a process, as is the whole process of preparing and applying for the maximum refund. Recovering any amount of your research and development is a good thing. Let's dig in.
The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" - Ronald Reagan
With all due respect to Mr. Reagan, thousands of businesses every year claim over 3 Billion dollars in refundable tax credit refunds! .. so we'll welcome that help on behalf of our clients at 7 Park Avenue Financial.
BENEFITS OF SR&ED FINANCING
One of the main benefits of SR&ED financing is that it allows businesses to access a lower cost of capital as many other types of financing are more expensive.
SR&ED finance costs are the lower they have ever been, and with banks not financing sr&ed claims and businesses unable to access bank financing many companies simply can't meet the requirements around working capital financing on terms they can live with.
Sred funding improves cash flow, as no payments are made during the duration of the sr&ed bridge loan - and a company can receive advance funding of their claim prior to filing for their refund if they choose. That becomes a source of predictable cash flow.
Many businesses that are eligible to file for sr&ed refunds find the effort costly and time-consuming - SR&ED LOANS help eliminate that concern which allows the company to continue to invest in new products, processes, and technologies. That becomes a competitive edge in any industry.
Not all Canadian business owners and financial managers are aware that one of the most significant government programs around tax credits still exist at both the federal and provincial levels. The formal name for the program is the Scientific Research and Experimental Development program. Most people call it simply the SRED (SR &ED) program; we have also heard many people pronounce it as 'SHRED '!
When we discuss the sr&ed program, we put Canadian businesses into two categories when we discuss the sr&ed program - those that don't know about the program period, and those that know about the program but are unaware that their sr ed claims can be financed.
SR ED financing is an excellent source of short-term cash flow and allows a company to reap the benefits in the cash and funds they have put into R&D.
ELIGIBILITY REQUIREMENTS FOR SR&ED FINANCING - A SRED PRIMER
It is probably useful to do a short overview - let's call it a SR&ED primer!
The sr&ed program is administered at the federal and provincial levels of the Canadian government. It is very important to note that the SR ED grant (yes it's non-repayable) is for Canadian private firms only - it does not apply to public corporations the program applies literally to almost every type of firm and industry in Canada. A company files its claim while it files its year-end tax return.
Businesses must meet certain criteria for eligibility under the sred program. That involves engaging in r&d / scientific research or experimental development activities that come under Canada Revenue Agency/CRA program guidelines.
Eligible expenses include salaries, payments to third-party contractors for work done in Canada, and certain materials and overheads attributed to the project. Businesses must be incorporated in Canada as Canadian-controlled private corporations and must not have any CRA arrears. Individuals and partnerships and non-profits are also able to file claims.
CRA reviews eligibility for claims and determines termines the amount of the refundable tax credit - it is that tax credit that allows a company to use the refund as collateral for a short-term sr&ed bridge loan.
THE ROLE OF YOUR SR&ED CONSULTANT - MAXIMIZING SR&ED TAX CREDITS & FINANCING
In our experience the majority, we feel almost 95%+ of claims are prepared by an independent third party. They have the expertise, credibility, and a strong knowledge of the program and the government requirements. We would further point out that if a claim is not prepared by a qualified third party then there may be an issue in financing the claim - not always, but sometimes.
There are a number of ' best practices a business should consider to maximize the value of their sr&ed tax credits as well as the financing that then becomes available under the refund.
Proper records should be kept to ensure all eligible expenses can be claimed - many firms use third-party' sr&ed consultants' during the entire process of claim preparation - they are experienced in navigating the program and can almost always increase the value of your claim - as industry experts, they tend t b up to date on program changes under the government rules and budgets of the program.
By maximizing the claim value they immediately increase the value of the sred refund around their cash management and tax planning practices.
Tac credit financing has very competitive interest rates and financing terms and the flexibility in a sr&ed loan makes total sense if you have a reasonable dollar amount in the claim - Claim sizes range anywhere from 60k to millions of dollars - Accessing sr&ed financing saves the company valuable management time in pursuing equity financing, grants, or other forms of high-cost financing such as short term working capital installment loans which, while accessible, come at a high cost.
HOW ARE SR&ED CLAIMS PREPARED
Claims can be expensive to process and prepare, and in general, the industry has evolved into two types of costs associated with the claim. What are those two cost scenarios?
1. The customer pays a third party in full for the time and preparation involved in the claim. The customer reaps the full benefits of the claim when it is processed
2. The customer signs an agreement on a contingency basis and pays the preparer of the SR ED a portion of the claim when it is approved - The bottom line he has no cash outlay and the SR ED consultant is at risk regarding the time and preparation involved in the claim.
FINANCING YOUR SR&ED CLAIM VIA 7 PARK AVENUE FINANCIAL - THE SR&ED FINANCING PROCESS
Let's now focus on sr&ed financing and your claim. The financing of the claim is somewhat of a boutique industry in Canada and requires specialized knowledge of the quality and collateralization of the claim.
Sr&ed financing is a simple process - businesses complete a basic application which also provides details of their claim and proper detail around the dollar amount of their claim. Supporting documentation around the claim preparation allows the financing application to be approved and funded in a total time of approximately 2 weeks from start to finish!
WHAT AMOUNT CAN YOU EXPECT TO RECEIVE ON A SRED LOAN? A SR&ED LOAN EXAMPLE!
It is important to understand that the collateral for the sr red funding is the sred claim itself! Typical financing is in the 75% loan-to-value range, so using a 200k sr&ed claim as an example the loan amount is 150k - The company receives the additional 50k when CRA processes the refund, less financing costs.
No payments are made during the duration of the loan!
DO BANKS FINANCE YOUR SR&ED CLAIM
The Canadian banks, as a rule, with only minor exceptions, do not make SRED loans, although, at 7 Park Avenue Financial, we have never figured out why they don't. Talk about a government receivable!
When working with a qualified financing expert, claims can be financed relatively quickly. From initial discussions, it is possible to complete a transaction in a couple of weeks.
DUE DILIGENCE / FINANCING APPROVAL
Naturally, some level of due diligence is required on the firm, and we point out that many firms are in fact total start-ups and are filing their claim for the first time. An additional financing note is that first-time claims are scrutinized more closely as the customer does not have a track record in this area.
KEY TAKEAWAYS - SR&ED LOANS
- SR ED tax incentives are part of a Canadian federal tax incentive program that provides tax credits to Canadian businesses for their research and development activities around scientific or technological uncertainty in r&d projects
- SR&ED financing allows Canadian companies to access capital based on eligible expenditures from sr ed projects around their anticipated SR&ED tax credits before they receive them from the government.
- Tax credit financing involves using the SR&ED tax credits themselves as collateral to obtain financing from a financial institution.
- Both types of financing can help businesses access the funding they need for research and development activities and drive innovation and growth in Canada in domestic and global markets
CONCLUSION - SR&ED FUNDING FOR THE FUTURE - USING TAX CREDIT FINANCING TO FUND INNOVATION
SR&ED financing is a valuable type of ' venture debt ', non-dilutive to equity financing solution for a Canadian business that invests in r&d and who wishes to receive financing sing sr&ed tax credits as collateral. Financing is a low-cost form of capital that improves cash flow at critical stages in the company's r&d process. Businesses remain competitive and leverage the power of refundable tax credits under the program to fund continuing innovation.
7 Park Avenue Financial is your solution provider for funding / sr&ed financing. We work with early-stage firms still in start-up mode or firms that have utilized the sred tax credit program for years-
If you utilize the research and development tax credit Canada, call 7 Park Avenue Financial, t a trusted, credible and experienced Canadian business financing advisor who can assist you with the ' special delivery' process on your SR&ED refund!
FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
What is SR&ED financing?
SR&ED non dilutive funding is a type of financing/business funding that allows a company to use tax credits under Canada's SR&ED (Scientific Research and Experimental Development) program - Companies can access financing as they accrue spending on r&d, or wait until they file a full claim - Reinvestment of this capital helps fund innovation and the collateral for the financing is the sr&ed refund itself
What is the meaning of SR&ED?
SR&ED is the term for Scientific Research and Experimental Development - Canada's federal tax incentive program providing refunding tax credits to businesses that qualify for eligible expenses for their r&d project. It is a generous investment tax credit program for any company conducting r&d in Canada that is privately owned.
Who qualifies for SR&ED in Canada?
For sr&ed qualifications, a company must be a separate legal entity and a Canadian-controlled private company or a sole proprietorship or partnership carrying out eligible r&d projects. All work must be done in Canada under Canada Revenue Agency / CRA guidelines.
What expenses qualify for SR&ED?
Eligible sr&ed expenses include expenditures around wages and payment to third-party contractors doing work for the business in Canada, Other qualifying expenses include certain material and overhead expenditures related to the systematic investigation on their sr ed project.
Items such as capital expenditures, financing costs, and marketing materials are not eligible under the program
The three main eligible expenditure categories are:
What are the SR&ED categories for eligible work?
The three main categories of SR&ED eligibility work are:
Basic research involves the advancement of scientific knowledge, while applied research is aimed at the practical application of scientific knowledge. Experimental development involves the development of new materials, devices, processes, or services that aim to improve existing products or create new ones.
"Tax Credit Financing for R&D Investment" by Huiwen Lai and Xi Weng (2018).
"Financing Innovation in Canada: The Role of Tax Credits" by Aaron J. Jacobs (2017)
"Innovation, R&D Tax Credits and Financial Constraints" by Romain Bouis, Sasan Bakhtiari, and Tomasz Obloj (2018)