How To Finance Canadian SR&ED Claims - SR ED Financing Accelerates Cash Flow

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FUNDING YOUR R&D - THE GROWTH FINANCING SOLUTION

Canadian business owners and financial managers who file SR ED (aka SR&ED, aka SHRED) claims in Canada are keenly aware that it is one of the true ‘government grants' that many people are referring to researching the broad topic of government grants and loans. Let's dig in on funding your SR&ED Progam claim.

WHAT ARE THE BENEFITS OF SR&ED FINANCING

The ability of your business to access cash for claims that have been filed ( or even if you wish to cash flow your claim in advance of filing ) is access to business capital that allows for further reinvestment into your business - The uses of those funds? Any general corporate purpose !.. including sales and marketing initiatives, or the funding of day-to-day operations -

You've unlocked that Sred receivable without the need to increase the current debt load, or, heaven forbid, issue more equity which creates owner equity dilution via a reduction in ownership percentage. Sred loans are your ramp and runway to working capital for the business.

Interest rates are very competitive in sred financing and given these are short-term loans they are often cheaper than accessing permanent capital at longer amortizations.

ENSURING YOUR QUALIFY FOR SR&ED - JOB#!

Most business owners working on r&d should be aware of the criteria involved in Sred eligibility. Three key areas must be met - those being technological advancement, the challenge of technical uncertainty, and the ability of your r&d to document in a content format the processes and work you performed to overcome challenges.

The issue of scientific and technological advancement is primary with the goal of a final solution to scientific challenges - and ensure you record your work along the way.

Funds approved in your SR ED claim are non-repayable, and we cannot think of a better program in Canada that both assists Canadian firms in ongoing research and development, as well as allowing Canadians to maintain momentum in new products, processes, and technologies.

Sred consultants advise that for small and medium-sized firms in Canada Canadian controlled private corporations can recover a large portion of salaries, sub-contract expenses, as well as the materials used in your r&d processes. Those exact percentage limits are defined by specific CRA criteria.

ORGANIZING YOUR SR&ED CLAIM

Businesses claiming sr&ed credits should ensure they can provide the appropriate documentation to their sr&ed consultant - that includes receipts, proof of expenses, and other supporting documentation under the project - Expenses submitted in sred must be eligible expenses that are direct or indirect in nature such as salaries or payment to independent contractors. Appropriate forms such as T2SCH31 should be properly completed to ensure sr&ed tax credit eligibility.

Ours is certainly not to question why the government provides such non-repayable grants, they do, and as a Canadian business owner, you want to maximize your claim - Financing sr&ed tax credits guarantees access to capital, preservation of existing credit facilities, and the ability to access talent in the workforce in your industry.

SR ED credits are applied every year when you file your tax return. Our focus is on ensuring the reader understands that this tax credit filing is the trigger that allows you to, if you choose, also finance your claim. the banks we feel probably aren’t fully comfortable with the collateral.

Canadian banks do not traditionally finance these claims. Most Canadian business owners also know that there is some risk involved in having your claim cut back slightly after the appropriate department in Ottawa reviews that hands SR ED claims.

If you wish to finance an SR ED claim, you must follow a much-defined process. Let’s review that process and provide you with some additional tips and information on how the claim is financed and what benefits might come from your claim's cash flow.

There exists in Canada a small boutique market in SR ED financing. Given this financing's unique and specialized nature, we strongly recommend that you work with a trusted, experienced and credible advisor in this area of Canadian financing. That will allow you to maximize the size of the financing we believe in and speed up the process.

WHAT INFORMATION DO YOU NEED TO APPLY FOR A SR&ED LOAN

When clients ask us how long it takes to finance a claim, we generally advise 2 to 3 weeks, assuming the full cooperation of your firm in the usual back-up to such a transaction with, of course, includes:

Copy of the SR ED (SR&ED) claims itself - if you wish advance funding provide data on accrued expenses

‘What amount of funds can we receive for our claim?’ That also is probably question number two from clients – and the answer is that claims are generally financed at 75% loan to value, which means simply that for every $ 100,000.00 of claim, you should expect to receive $75,000.00.

FINANCING YOUR CLAIM PRIOR TO FILING YOUR REFUNDABLE TAX CREDIT

Sr ed claim applicants can receive advance funding on those billions of dollars that the Canadian government prices under the ' Scientific Research and Experimental Development (SR&ED) tax credit program.

R&D claims come from every industry under the Sr ed program - that's biotech, software, manufacturing, the oil and gas industry, as well as the agricultural area of the Canadian economy - Even foreign-owned firms can access SRED funding if the work is performed and funded in Canada

Many firms choose advance funding of their claims given that potential audits of the claim can further delay your final refund cheque from the government - it would not be unusual for a total of a year and a half to expire from the start of your r&d to filing and final refund - so getting funds prior to filing is a solid cash management solution. Eliminating that time gap allows you to reinvest funds, continue growing, and fund day-to-day operations and additional r&d.

SR ED financing is structured to your firm’s benefit – that is that they are loans that have no payment during the term of the loan. The term of the loan is, of course, simply as long as Ottawa takes to process your claim.

Various factors are involved in the timing – we can generally say it takes anywhere from two to twelve months to process your final refund cheque from Ottawa. At that time, the other 25% of the claim is returned to you by the SR&ED financier, less the financing cost or the ‘total time to carry the loan.’

KEY TAKEAWAYS - FINANCING SR&ED REFUNDABLE TAX CREDITS

Any business involved in r&d and filing for a refund via refundable tax credits can benefit from the program

Access to business capital can help eliminate the constant struggle that many earlier-stage firms, as well as SME firms in general around issues such as cash flow and working capital. Traditional financial institutions have requirements that many firms simply cant meet - so financing sr&ed tax credits provide access to capital given that many firms can't provide additional collateral or leverage external financing.

Cash flows around sred tax credits can be used for a variety of company purposes around meeting the current obligations of the business. Most experts agree that firms that continue to invest in r&d have a greater chance of success around their innovation when it comes to growing sales and the business valuation that comes with leading-edge technologies in any industry.

CONCLUSION - SR&ED LOANS

So, in summary, you can, of course, wait from 3-12 months for your refund cheque for your SRED claim, but why not consider putting that working capital and cash flow to work now. In reality, all you are doing is collecting a receivable (the SRED claim) faster than waiting for a long period of time.

Put that money into more R&D to stay competitive in your industry, reduce your payables, or invest in additional marketing or machinery. Talk to 7 Park Avenue Financial, your SR&ED finance advisor today!

What is Sr&ed Financing?

SR&ED financing allows Canadian businesses to receive financing for a sred refund claim via an investment tax credit that has been filed, or, if the business chooses, in advance of the filing based on eligible accrued credits - This financing eliminates the need to wait for the filing of tax returns and processing and review of the r&D claim by Canada Revenue Agency. Funding r&d on a constant basis builds up the account receivable that is accumulating under the sr ed investment tax credit program - the business's inability to unlock the value of that refund presents a cash flow challenge to firms who don't finance their claims, The time can be significant based on the timing of your year-end, preparation of your claim, and then the processing and review and audit around the sr ed tax refund claim.

Sred loans are short-term bridge loans that deliver on cash flow needs in lieu of waiting for CRA to review and process the claim. Financing credits that accrue create a ramp to ongoing cash flow injections into the business.

What is a CRA review of a Sr&ed claim?

Cra reviews of a claim are not necessarily financial audits but instead a review of work under scientific or technological advancement of the r&d, - in many cases they are desktop audits around the scientific or technological uncertainty in the technical and financial content of the Sred claim itself. That might include a review of technical drawings, systematic investigation, project records that establish technological uncertainty .- etc.

CRA also provides a pre -advisory 'first-time claimant ' consultations for firms beginning their SR&ED process- including information about eligible expenditures in the final project report . Payment accounting records might also be reviewed. Many of the firms filing are engaged in software development. SR&ED pre-claim consultation will reduce reviews and audits when sr&ed eligibility is in question.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

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