An intro to SR&ED financing

Guest Author
May 28, 2021
4 minute read
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What is SR&ED Financing?

As more and more companies focus on innovation, funding options for these high-growth companies have expanded as well. A new and reliable form of financing that is specifically geared at supporting innovative companies investing in R&D is the SR&ED loan, alternatively called SR&ED financing.

But first, let’s look at what is SR&ED/SRED.

What is the SR&ED Program?

Every year the Canadian government provides millions of dollars for focusing and improving on research, technologies, and products under the Scientific Research and Experimental Development (SR&ED) Program. This federal tax incentive program run by Canada Revenue Agency (CRA) encourages Canadian businesses of all sizes to deduct R&D expenses from their taxes or receive a cash payout if they are involved in significant R&D projects.

The SR&ED tax incentives can come in one of three forms:

  • an investment tax credit (ITC)
  • an income tax deduction
  • a refund

The program entitles companies to claim 35%+ of their eligible expenditure in the form of a tax reduction or a cash payout. When provincial programs and overheads are taken into account, cash refunds for CCPC’s can be more than 55% of expenditure.

Canada has one of the most successful R&D tax incentive programs in the world. Unfortunately, even though many businesses are eligible to apply, the number of companies applying to these schemes is still meager.

What activities qualify for SR&ED tax incentives?

As per the CRA, in addition to being carried out in Canada, your project must meet 3 standards to be able to file SR&ED claims.

  • Technological Advancement – project must further technical knowledge.
  • Technological Uncertainty – in the course of the project, you must have faced technical uncertainties and overcome them.
  • Technical Content – project must have gone through an iterative process to attempt to resolve technical uncertainty.

There are various types of activities that fall under these criteria, including research, design, and testing.

How do I access SR&ED tax credit?

There are different ways to access SR&ED and its varied rates. The major categories of businesses eligible for the incentive are:

  • Canadian Controlled Private corporations (CCPCs)
  • Individuals (proprietorships) and trusts
  • Other corporations
  • Partnerships: Only tax-paying entities are eligible for tax credits. Claims for partnerships can be done at the level of the component members, be it individuals, trusts, or corporations.

One way to determine how to access SR&ED is by working with a reputable SR&ED tax advisor, especially if you’re also looking for SR&ED financing (more on that later). Alternatively, businesses can also file their tax credit application themselves.

What is SRED/SR&ED Financing?

The SR&ED tax credit has been a sustainable source of operating cash for many Canadian businesses for decades. Although one of the most reliable sources of money a company can have, one of the problems with the scheme is that is quite slow to materialize. Companies that are in need of liquidity often cannot afford to wait months, sometimes up to a year, to receive the refund of their tax credit.

SR&ED financing is a form of funding that allows eligible corporations to make use of its future tax credit refund as collateral for an affordable loan.

A type of debt financing, SRED funding allows you to potentially access funding within weeks, and then use it as working capital to continue on your path of growth. The loan is then repaid from the CRA as a refundable benefit. The main condition for qualifying for an SR&ED loan is, of course, you have qualify for the SR&ED tax credit.

How can you get SR&ED financing?

This type of SME financing option is great for companies that are highly innovative and haven’t started generating revenue yet. SRED financing is a popular funding option for research-heavy industries such as software/hardware development and engineering.

The requirements to apply for SRED tax credit loan are simple. Your business should:

  • Be based and incorporated in Canada
  • Have significant levels of R&D expenditure
  • Have qualified expenditure for SR&ED investment tax credit

What are the benefits of an SR&ED loan?

An SRED tax credit loan can be a great source of liquidity for your growing business, especially if you are pre-revenue or between funding rounds.

Leverage the SR&ED financing loop

As a high-growth company with considerable technology, chances are you will use at least part of the loan to further invest in R&D. With leveraged funding, you can keep putting money back in furthering your R&D and, as a result, receive an SR&ED tax credit in increments throughout the year.

Speed up your market entry

Speed is key is growing your competitive advantage. As a founder, you may have a clear idea of how you want to grow your business, but funding can often pose a bottleneck in achieving this growth. With an SR&ED loan, you can obtain your funds early and inject it into your business for accelerating past competition.

Stay in control

For most early-stage and scaling companies, selling equity often seems like the only viable option. R&D-based financing can be a great alternative as it uses a future asset to fund current cashflow, without diluting your operating position.

Avail a cheaper option

Selling equity can be an expensive undertaking. With debt financing, like SR&ED financing, you will know exactly how much you will end up paying the lender: the principal plus interest & fees.

If you want to explore SR&ED financing for your business, here’s a comprehensive resource on the how, what, and why of SR&ED tax credit finance. And this funding option is not just available for Canadian businesses. There are similar financing programs all around the world. For example, you could access R&D incentive loans in Australia, or R&D tax credit loans in the UK, as well. Get in touch with Fundsquire to learn more.

When the time comes to get funding for your business, there are several options you can avail of. In order to pick the best one, you’ll first need to understand the current situation your business is in, what the various alternatives are, and your overall objectives.

This post was written by Fundsquire, a global startup and SME financing company with offices in Canada, Australia, and the UK. They empower entrepreneurs by providing fast and simple non-dilutive capital to grow their businesses through services like SR&ED Finance and Revenue Based Finance.

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