The Secret Weapon of Canadian Startups: Exploring the Advantages of SR&ED Tax Financing and SRED Loans
Maximize Your R&D Investment: A Comprehensive Guide to SR&ED Tax Financing and SRED Loans
YOUR COMPANY IS LOOKING FOR CANADIAN SR&ED TAX FINANCING!
THE ROLE OF SR&ED LOAN FINANCING IN FUNDING YOUR INNOVATION AND GROWTH
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HOW TO ACCESS SR&ED LOAN FINANCING FOR YOUR BUSINESS
SR&ED Financing (also often pronounced 'SRED Financing' ... we'll use the term interchangeably) is an excellent way for Canadian firms to monetize their research and development investment tax credit claims to generate additional cash flow and working capital for their business. Let's dig in!
Canada's SR&ED (Scientific Research and Experimental Development) tax financing program is a tax incentive program in Canada designed to encourage businesses to engage in r&d. Businesses can finance their SR&ED tax credits through the SRED loan process, allowing the company to access cash flow immediately, rather than waiting for the actual tax credit disbursement refund from the government / CRA.
The sr&ed loan process is valuable, particularly for startups as well as other SME established businesses - that is because it is an alternative and valuable source of funding that helps fuel innovation and growth objectives of the company, By leveraging sred tax credits as the sole collateral for the bridge loan cash flows can be accessed prior to waiting for the government disbursement of the tax credit which at times can take many months or longer.
BE A SUCCESS STORY IN ACHIEVING THE BENEFITS OF SR&ED TAX CREDIT FINANCING!
Understanding SR&ED Tax Credits is all about the government's focus on the program to encourage companies to engage in research and development activity. Private businesses, ie Canadian Controlled Private Corporations (CCPCs) qualify for refunds up to 50% OF eligible expenditures of their sred project under sr&ed tax credit calculations- That refund can help businesses to further expand r&d efforts.
The program encourages businesses to conduct research and invest in r&d and innovation in the Canadian economy in all industries. In doing this, companies can claim a refund for eligible expenses under a refundable tax credit via Canada Revenue Agency/CRA.
The challenge Canadian businesses experience under the program is that the timing around the process to claim and receive the credit is potentially lengthy for various reasons.
ENTER SRED FINANCING! This financing solution concerns businesses claiming the credit to access funding as soon as they file their claim - or if desired - before filing!! Talk about cash flow 101! That's why every business should consider sr&ed loan financing as a part of their cash management and ' Capital Stack ' - ( Thats the term those finance folks use to talk about the different layers of debt and equity financing in your company around senior debt and owner equity )
INNOVATIVE FINANCING FOR YOUR R&D CAPITAL INVESTMENT
One key benefit of Sred financing is that these short-term bridge loans around your r&d claim are 'non-dilutive' in nature - Business owners do not have to give up or raise any more additional equity unless they of course choose to do so.
So these lump sum short-term sr&ed bridge loans provide additional working capital into your business for eligible projects - and growth capital is what early-stage and pre-revenue growth businesses are about! Even more attractive to business owners and their financial managers is the simple, quick, and efficient application process - Talk to our 7 Park Avenue Financial team about how simplified that process is.
Third-party sr&ed consultants your firm uses will help maximize your sr&ed credit refund.
It is common sense that to finance a claim and get funds now, you have to have a claim filed! Canada's SRED program is one of Canada's most positive, beneficial and proactive non-repayable grant programs, bar none.
BUSINESSES USING SR&ED TAX CREDIT FINANCING
Over the years, we have met with many clients who, unfortunately, haven’t even heard of the program, at that same time for years, they have been allocating considerable funds to research and development in manufacturing, software creation, etc.
We say software for a specific example, because, in many ways, it is one of the most apparent areas for SRED, and your ability to generate an SRED loan against software development is virtually almost guaranteed. But our point is that any R&D you do probably can be assessed for research and experimental development - That’s where the acronym comes for Scientific Research and Experimental Development = S R E D!
Many professionals in the SRED area advise our clients that out of the several billion dollars that the government hands out now for the program, almost twice as much remains unclaimed by Canadian businesses simply because firms have not heard of the program. One of the key cornerstones of the program is the term 'uncertainty' - if your firm is working on products, processes etc. and is unsure of the final result, and funds are expended against that research, then clearly that’s SRED!
Well up to this point we have talked about the program and detailed when it is available; now let’s focus on generating cash for our R&D expense.
BENEFITS OF A SR&ED LOAN
The ability of the business owner to schedule cash flow disbursements under their claim helps many a company stay ' cash flow positive ' during critical stages of a company's growth. CRA provides r&d funding to over 20,000 businesses annually, with billions of dollars refunded under the program's tax credit incentive. Why would a business owner wait many months versus accessing business capital as needed?!
Access to sr&ed financing becomes a competitive advantage - your businesses grow faster while continuing to innovate! Most businesses use the sr ed refund to further invest in their research and development but funds can be used for any general purpose - Retaining ownership while maximizing the value of the company is the goal of every business owner, and sr&ed financing is non-dilutive in nature and helps owners maintain ownership equity as the company is growing.
Loan-to-value ratios in sred funding are typically in the 75% range and a business can receive a lump sum installment as well as having the ability to arrange for ongoing disbursements as work is done - You can think of it assr&ed credit line!
No payments are made for the duration of the loan period. The repayment option is focused on the loan being repaid on receipt of the sr&ed tax credit refund. Interest rates are very competitive - talk to the 7 Park Avenue Financial team on how you can achieve the lowest sr&ed loan rates in Canada.
NAVIGATE THE SR&ED TAX CREDIT PROCESS... QUICKLY!
You have two options after you have prepared an SRED claim and filed it. They are not very complex options:
1. You can wait for your technical audit, financial audit and the government cheque, which will arrive many months later. If it is your first filing, the process will take much longer.
2. You can finance, or 'discount' - we can even call it 'factor' your SRED to generate an SRED loan for immediate working capital.
LEVERAGE YOUR SR&ED TAX CREDITS FOR GROWTH AND EXPANSION
SRED Loans can be generated immediately after the filing of your claim. Many of our clients start the financing process earlier, and the reality is that funds could be advanced precisely when filing. Many firms are very surprised to hear that in certain circumstances; you are actually eligible to receive funds during the year prior to filing - We have termed this process as 'accrual SRED financing'. A few more criteria are attached to this process but isn’t it a great idea to know that your R&D could be funded along the way as you dispense your own capital for the projects?
THE SR&ED TAX CREDIT LOAN PROCESS
'What's involved in an SR&ED financing'? Clients ask. To keep things simple, we advise that they view SRED financing like they view business financing or working capital financing applications. It’s a clearly defined process which is as follows:
1.Prepare a SRED claim (more often than not with the help of an external consultant)
Qualifying for a sr&ed tax credit loan means your firm must ensure you have eligible expenditures under the program. As we have noted the role of a company's SR&ED consultant is key - while a firm is not obligated to engage a third party to prepare the claim these consultants have proven they can maximize a claim and further enhance your ability to finance the claim - Many consultants work on a contingency basis so risk if filing a claim is eliminated.
2. File the Claim
3. Complete a business financing application
It's as simple as that. Typical backup documentation and due diligence that you would associate with any financing of your firm apply.
HOW MUCH CAN YOU GET UNDER A SRED FINANCING LOAN?
Oh, and a final question we always get - How much can I get, and how do payments work? The excellent news is there are no payments made for the duration of the loan, you usually get around 75% of the claim value on approval, and the balance could be called a holdback or buffer. When the government and the grant process, your cheque is mailed to you, and the additional 25% is released, less the very competitive financing charges.
CONCLUSION: YOUR GUIDE TO SR&ED LOAN FINANCING IN CANADA
SR&ED tax financing provides a powerful tool for Canadian businesses investing in r&d. Financing a claim provide more funding to drive innovation and growth objectives of the business, The ability to access cash and retain business ownership without the need for further equity becomes an immediate competitive advantage.
Flexible repayment or using regular disbursement schedules helps a business better manage day-to-day financing needs around the core operations of the business. Accessing financing for r&e contributes to the growth and progress of Canada's economic development.
Investigate the benefits of funding sr&ed tax credits as a financing solution for your business.
KEY TAKEAWAYS :
Sr&ed funding is a customized alternative financing solution that allows a company to ' cash flow' the sr&ed refund
Financing the SR&ED credit is a non-dilutive form of financing - monetizing the sred refund government receivable does not dilute owner equity and helps the business accelerate their growth objectives
The sr&ed loan process is fast, easy, and efficient
Any company qualifying for sred can finance their r&d refundable tax credit incentive under the program as a creative alternative financing option
SR&ED financing is a solid solution for businesses investing in r&d and who require cash - That is more so when sales are growing and there is a requirement for more working capital without taking on debt or having to give up further equity. In some cases, product and service development can take longer than expected and can exacerbate the cash drain .
Consider monetizing your SR&ED claim for valuable cash flow and working capital generation. Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with financing sr&ed tax credits and providing sred loans for growth capital and expansion. Maximize the impact of your investment in business innovation.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK /MORE INFORMATION
What is sr&ed debt finance?
SR&ED debt finance is a financing solution that offers businesses access to their future SR&ED refundable tax credits which are in effect an account receivable, in advance of receiving the government refund under the sred federal tax incentive program - A business can view the sr ed credit as a government account receivable which translates into a form of a receivables funding facility (loan) based on the anticipated refund.
What is the SR&ED program, and how does it work?
Canada's sr&ed/cra program is called the Scientific Research and Experimental Development (SR&ED) program. It is a tax incentive program in Canada that encourages Canadian businesses to invest in research and development activities , while allowing eligible businesses to claim a refundable tax credit; The sr&ed tax credit calculation is in the 35% range for all r&d expenses eligible under the program. Most firms applying can receive a cash refund, while in some cases, the credit offsets income taxes.
What is SR&ED tax credit financing, and how can it benefit my business?
SR&ED tax credit financing is an alternative financing solution that allows businesses to cash flow their sr&ed tax credits without have ing to wait for approval and refund, as well as a review of the claim, by working with a trusted business financing advisor. SR&ED loans allow companies to receive advance funding of the claim as part of their cash flow management. Businesses utilize the cash refund for ongoing r&d and general working capital around the business operations. SR&ED credits accounting treatment is simple as the sr&ed claim is an account receivable from the government.
How do I qualify for SR&ED tax credit financing, and what are the requirements?
To qualify for sr&ed tax credit financing, businesses much have an eligible claim under the CRA's sr&ed tax credit program. Financing for the tax refund can be received upon filing the claim, but if the company chooses, a business can access advance funding for accrued r&d work to date.
What are the advantages and disadvantages of using SR&ED tax credit financing?
The advantages of A SR&ED tax credit loan include accelerating cash flow versus waiting for the Canada Revenue Agency/CRA to process and/or audit/review the claim for the sr ed tax incentives of the program. Although financing the claim consists of a financing cost the interest rate for this method of financing is very competitive versus consideration of additional equity financing/venture capital, or higher-cost short-term working capital loans, which require personal guarantees and collateral. Funding is limited to approximately 75% loan to value of the total claim or accrued r&d.
How can I find a reputable financing company that offers SR&ED tax credit financing?
Businesses can speak to a trusted, credible, and experienced Canadian business financing such as 7 Park Avenue Financial, which has approximately two decades of tax credit finance expertise in sred tax financing sred loan solutions, and other traditional and alternative funding. Rates and terms in sr&ed finance are the lowest and most competitive in the industry. Any separate legal entity / Canadian-controlled private corporations and individuals and partnerships can apply for financing via their claim for scientific or technological advancement for their sr ed claims. The sr ed claim process is easy and efficient.
WHAT TYPE OF WORK IS ELIGIBLE FOR SR&ED RESEARCH
Work eligible under sr&ed research is research and development businesses undertake to ' advance knowledge ' via business innovation in creating new products and processes via research and experimental development. Basic and applied research are covered under the program as well as the software and test, and analysis of new materials and products and processes around scientific or technological uncertainty - Canada Revenue Agency provides a clear description on the government website around which r&d type activities are not eligible and ultimately Cra reviews and potentially audits claims.
WHAT ARE SR&ED TAX CREDIT INCENTIVES
SR&ED tax credit incentives under the Canadian "Scientific Research and Experimental Development" program are refundable tax credit incentives that provide financial support and assist businesses in Canada with financing to invest in r&d projects. Combined federal and provincial tax credits under the program are in the 35% range of eligible expenditures on sr&ed projects for innovation funding- These tax credits are provided as an incentive by the government to allow Canadian businesses to compete in economic growth in their industry domestically and internationally. Financing innovation and the growth of Canadian companies are cornerstones of the program for established companies and startups.
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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil