Improving Your Cash Flow – The Basics Of SR&ED Financing

The Federal Government’s Scientific Research & Experimental Developmental tax credit program, more commonly referred to as SR&ED, has been a boon to Canadian businesses whose developmental initiatives have enabled them to qualify for this lucrative incentive. The program provides a tax credit or cash refund, and is important to businesses to further their developmental work, whether it be to create a new (or improve an existing) product, process or material. Businesses whose SR&ED claims are approved and who are entitled to a refund, however, face one major challenge - waiting anywhere from several months up to a year after their claim is filed before they are actually in receipt of the funds.

This delay can impact available cash flow for many businesses which would benefit greatly by having these funds available to them sooner rather than later. For these businesses, SR&ED financing can be a valuable option to inject a virtually immediate infusion of working capital into R&D or other activities, by enabling the monetization of a filed SR&ED claim. Here’s how SR&ED financing works.

To apply for SR&ED financing, which is typically available through specialized market lenders and some banks, you’ll need:

1. An eligible SR&ED project that stands a good chance of success, preferably prepared by a third party consultant.
2. A track record of one to two years of successful SR&ED claims, although exceptions may be made for first-time filers under certain circumstances.
3. Financial statements and tax returns for the previous year.

Assuming the business’ loan application and SR&ED claim are in order, the approval process and receipt of the funds generally takes from 2 – 4 weeks and, in certain conditions, can even deliver financing prior to the formal filing of the SR&ED claim with the CRA.

How much can you expect to receive through the SR&ED financing process? Businesses typically apply for 50-70% of the total SR&ED claim amount, with the remainder held in reserve by the lender. For example, a $100,000 claim can provide up to $70,000 in working capital using the traditional financing model. For many businesses, this injection of cash enables them to conduct additional developmental projects or expand more rapidly in other areas of their business which can most benefit in the short-term.

Despite the obvious benefit that some businesses could achieve through SR&ED financing, this form of support is often overlooked by many eligible business owners. In many cases, businesses are simply not aware that SR&ED financing is available or are unsure how to secure a SR&ED loan. Yet monetizing a SR&ED claim now, instead of waiting several months for a cheque from the government, can be a great option for many organizations.

How much will SR&ED financing cost you? Rates vary, based on a number of criteria specific to each SR&ED lender, and generally range from 1.5% to 3% for each 30-day period. A typical financing term is 4-6 months, during which time the majority of approved SR&ED claims are paid by the CRA, although loans can be obtained for a minimum period of 60 days and do not generally exceed 1 year. In addition to the financing fees, businesses must also be prepared to pay legal fees of approximately $500 and 3rd party SR&ED reviewer fees, which most lenders use to confirm the validity and value of the SR&ED claim, which can range from $1,500 to $2,500.

Part of the lending process includes assigning the SR&ED refund to the lender. While the SR&ED claim is in process, loan payments are generally waived, and financing fees are deducted by the lender from the reserve amount once the claim is approved by the CRA and the refund is issued. Businesses should note that, regardless of the outcome of the SR&ED claim, all principal, fees and interest for the SR&ED loan must be repaid.

While a business could technically prepare and file a SR&ED claim on its own, it is generally recommended by financing companies to work with an experienced and reputable SR&ED consultant with a proven track record. The right consultant can help to remove uncertainty from the process, relieve pressure on internal resources, and help accelerate the preparation of the claim. .

If you would like more information on financing SR&ED claims or on the SR&ED process in general, please contact Jason Schwandt at TSI at 905-738-6770 x2010