How to Get Financing From Research & Development / R&D Tax Credits You have submitted your tax claim under the Canadian
SR&ED program and now want to undertake your research and development, but that is expensive and you will have to wait some time for your tax refund to come through. So what do you do? Well thankfully the finance world in Canada has come up with a solution – SR&ED Tax Factoring.
If you have bona fida research and development to undertake or are already undertaking and can prove that you have submitted a SR&ED tax claim you will normally be able to obtain SR&ED Tax Factoring.
Typically banks shy away from offering this service as they do not understand the process well enough; also they are adverse to the risk of the tax claim not being accepted.
It is left to specialist financing firms to offer SR&ED Tax Factoring as they have both the specialist research end development engineering and scientific knowledge as well as experience of claiming for this tax.
Usually the first question from a cash strapped company is “how much can I borrow?” This is governed by the percentage of loan to value or LTV as it is normally called. This in layperson’s terms is the percentage of the final tax claim that can be borrowed ahead of the tax claim being settled.
After all the research and development as well as the tax claim has been examined, the standard LTV offered is usually 70% of the claim until the tax claim has been accepted. After the tax claim has been agreed by the Canadian Revenue Authority (CRA) the LTV can go up to 100%. This is because an agreed tax claim is going to be paid out so the risk is low. Thus the SR&ED claim itself is used as the collateral for the financing.
Obviously there are costs involved in undertaking the financing, as in all financial matters. Canadian businesses do appreciate and benefit from the increased cash flow that SR&ED factoring brings to their company.
There are also financial and accounting benefits in that this type of factoring is not a loan so it does not need to show as a debt on a company’s balance sheet. SR&ED factoring is merely the monetizing of a SR&ED tax claim with the actual claim being used as the collateral.
If the SR&ED factoring is structured correctly then no payments are required for the duration of the financing which increases the company’s cash flow. Any financing costs are deducted from the payment of the SR&ED tax claim, just when the company has the available funds to make such a payment.
For those companies that also apply for a provincial
SR & ED program credit can also receive SR&ED factoring, making this provision doubly beneficial to any Canadian company undertaking research and development within Canada.