With limited venture capital opportunities in Canada, high-tech small to medium enterprises (SMEs) often rely on friends and family, followed by government funding, in order to finance their businesses. One of the more critical forms of government financing for a SME is the Scientific Research and Experimental Development (SR&ED) tax incentive program. The SR&ED program can provide refundable tax credits (i.e. in the form of cash) to reimburse Canadian companies for eligible research and development expenses incurred.
Unfortunately, the downside of SR&ED is that it can take 1-2 years before the refund is received from the federal government. Many SMEs simply cannot afford to suspend business to wait for this critical source of funding, nor can they gain access to equity financing. This effectively creates a “funding gap” that is detrimental to further commercialization.
Financing of SR&ED Accruals Helps to Bridge Funding Gap
Recently, an innovation, non-dilutive accrual debt financing instrument has been developed that finances SR&ED claims before they are filed. Several institutions and banks exist which may factor SR&ED claims after they are filed; however, SR&ED accrual debt financing occurs BEFORE filing. To finance a claim before the filing date, a firm must have a hands-on understanding of the SR&ED claim and the SR&ED program, in order to mitigate the risk.
SR&ED accrual debt financing effectively assists SMEs to create excess cashflow to grow their businesses. Because SR&ED financing is debt-based, it is non-dilutive and far less costly than dilutive equity-based financing. From a financing perspective, a business should always take advantage of lower-cost forms of financing, before more expensive forms. Thus, SR&ED financing can effectively be used as bridge financing to extend the runaway until future rounds of funding.
More about the SR&ED Program
Administered by the Canada Revenue Agency (CRA), the Scientific Research and Experimental Development (SR&ED) program is the largest business incentive program in Canada. Currently valued at $3.5 billion, the goal of SR&ED is to encourage businesses to conduct research and development activities in Canada.
Eligible SR&ED expenditures may qualify for investment tax credits that can be refundable credits (i.e. cash refunds), non-refundable credits (i.e. to be applied, carried backwards, or carried forwards against taxable income), or a combination of both. Qualifying expenditures may include wages, materials consumed, machinery, and equipment that are attributed to:
(1) Experimental development,
(2) Applied research,
(3) Basic research, or
(4) Support work.