This is a guest post by our friends at Easly.
If you're a Canadian company conducting R&D, there's a good chance you've heard of the Scientific Research and Experimental Development Tax Credit Program (SR&ED). If not, you can learn more about it here. The SR&ED program provides companies conducting eligible research and development work with tax credits. They accrue these tax credits throughout the year as they spend on eligible expenditures and then claim them with their annual taxes. Each year, the program provides more than $3B in tax credits, about half of which are refundable – meaning you can earn a cash refund but only after filing your taxes. The program is offered federally, along with some provinces and territories providing their own additional tax credits. If you'd like to know what additional R&D tax credits are offered in your jurisdiction, check out this resource.
The SR&ED program, while incredibly valuable, has room for improvement. An annual lump-sum refund is nice, but companies need capital to cover their recurring cash burn. That's where SR&ED financing comes in. With SR&ED financing, you can tap into your accrued tax credits throughout the year rather than waiting up to 18 months for that annual lump-sum refund. SR&ED financing is gaining prominence as a strategic way to smooth cash flow, accelerate projects, extend runway and bolster balance sheets, particularly in the current tight capital environment where traditional debt is increasingly expensive, and venture capital deals have slowed.
How Does SR&ED Financing Work?
An example of the status quo of how the SR&ED program works is as follows;
- A company based in BC is conducting an R&D project that meets the eligibility criteria of the SR&ED program. For all of their eligible expenditures, they'll receive a 35% tax credit rate federally and a 10% provincial top-up, totalling a 45% total tax credit rate.
- For simplicity, let's assume that the company is spending on the R&D project evenly every quarter.
- After the fiscal year-end, the company will submit their SR&ED claim to the CRA.
- Let's also assume that the CRA does not need to conduct an audit/review of the claim (which can delay things further). A few months after the claim is submitted, an annual SR&ED refund is issued by the CRA to the business.
- As you can see from the chart, the company spends on eligible expenditures throughout the year and receives a lump-sum refund sometime during the following year.
- It's hard to argue that receiving a refund of 45% of your eligible expenditures is a bad thing. The question is, how can you optimize your SR&ED credits?
Let's look at the same example but assume the company is taking quarterly draws on their accrued tax credits using SR&ED financing.
- As the company accrues SR&ED credits for spending on eligible expenditures throughout Q1, they approach SR&ED financing provider Easly to receive an Easly Advance on 75% of their accrued credits within two weeks.
- The company then repeats that every quarter for the tax credits accrued within that quarter, providing consistent, frequent injections of cash into the business throughout the year.
- After submitting their SR&ED claim at the end of the year, the CRA refund is used to repay the principal and fees of the advances, and the remainder goes into the company bank account.
- Using SR&ED financing, the company has received access to their SR&ED refund months in advance and on a cadence that is more conducive to the cash burn requirements of a growing company.
This example illustrates the benefits of using SR&ED financing to receive a steady flow of capital at regular intervals throughout the year. There are other ways companies can use SR&ED financing, such as bringing forward a large chunk of funds to purchase critical equipment or to put up for the co-investment of a grant application. The key is that it gives you control over the timing of your funds.
What to Look for in an SR&ED Financing Partner
When exploring SR&ED financing options, it's crucial to know the key features that can maximize its benefits for your business, whether you're in the startup phase or scaling up. Look for the following when seeking an SR&ED financing partner:
- No Application Fees: Running a business is a costly endeavour with many recurring expenses. Opt for a provider that doesn't demand payment just to apply, thereby eliminating financial hurdles to secure funding.
- Transparent, Standardized Terms: Navigating financial jargon can leave you confused and needing legal support to clearly understand agreement terms. Seek a provider that offers clear, simple terms to ensure full transparency and avoid unexpected complications later.
- Cash Flow Positive: For an emerging startup, managing cash is vital. Choose a provider that doesn't impose monthly servicing fees, unlike many conventional debt options, ensuring your cash reserves aren't dwindling while you leverage your SR&ED credits.
- Timely Access to Funding: Every business has its own set of financial needs. Make sure your chosen financing partner enables you to access funding on a schedule tailored to your company's requirements. Also, make sure the funding process isn't going to take a long time. An SR&ED financing partner should provide you access to capital within a few weeks of applying, not months.
- Founder-Friendly: Some financing options come with stringent reporting requirements and limitations on fund usage. The best SR&ED financing providers will have no such covenants, no usage restrictions, and won't demand personal guarantees.
Conclusion
To gain a more detailed understanding of the SR&ED tax credits your business could be eligible for, try using an SR&ED refund calculator, such as the one created by Easly, a frontrunner in the SR&ED financing sector. This tool calculates varying tax credit amounts based on different types of spending, as well as regional reimbursement rates, giving you an approximate idea of the capital accessible to you through the SR&ED program.
SR&ED financing serves as more than just a capital resource—it acts as a tactical instrument for enhancing cash flow management and dictating the timeline of your funding. Unleash your business's growth potential and pave the way for enduring success and stability by tapping into your accrued SR&ED tax credits with a provider like Easly. Reach out to speak to one of their financing experts and learn how Easly Advances can help.
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