SR & ED Financing - A Canadian working capital alternative
Stan Prokop
SR & ED (aka 'SR ED ' ) financing in Canada is somewhat of an under used working capital and cash flow financing solution in Canada. Let's explore the key basics of what SR ED is and how Canadian firms can maximize the benefit of the program. By maximizing we mean turning that government non repayable grant into cash flow sooner than you had anticipated.
Most Canadian small and medium large businesses finance their day to day working capital via bank credit lines or non bank alternative financing facilities, such as asset based lending, factoring and receivable discounting. If your firm has such facilities in place, for example with a Canadian chartered bank then you are receiving probably 75% of your receivables and perhaps 50% of your inventory as eligible financing.
Did you know that your SR ED can also be in this working capital category? Let's cover off how that is, and how it can work to your cash flow advantage!
The basic strategy around SR & ED financing is the securing of a separate financing facility outside of your current financing arrangement. If you have secured credit facilities with other lenders you will of course found out by now that they, (the Canadian chartered banks) do not finance SR ED claims and advance your firm working capital against those claims. Therefore you are in essence creating a separate short term financing facility around the SR & ED claim that you have just filed.
In normal circumstances companies that file SR ED claims particularly on a first time basis can wait well close to a year to receive their funds from the federal and provincial governments. Remember the great benefit of these funds, which is they are a grant, they are non – repayable. Recent Canadian federal budgets have re affirmed the Canadian government's commitment to this great program for Canadian business. The government lays out well over a Billion (yes that's a billion!) dollars to this program every year. In fact the number appears to be approaching 2 Billion.
So what have we found discovered so far? SR &ED claims a great way to recoup a large per cent age of all the funds you have invested in research and development and experimentation during the past year. In fact you can claim up to 2 years of work.
The Canadian SR ED program is Canadian government's way of assisting firms who are moving forward with innovative products and services. To be eligible to file a claim your firm must be a private Canadian owned company , have prepared and filed a proper SR ED claim in conjunction with your annual tax filing . We would point out that if your company has arrears with Canada Revenue Agency these arrears will be set off against monies due to yourself under the claim.
Also, if cash flow and working capital are at the top of your importance list your claim can be financed with the assistance of an experienced and credible SR &ED financier. This is truly a boutique industry in Canada and business owners and financial managers are urged to seek out trusted and credible advisors in this niche financing area.
Under the concept of SR ED financing your SR ED is security for a working capital loan – funds are advanced to approximate 70% of your filed claim. If properly structured you would not make any payments under this cash flow infusion, and would repay the principal amount of the SR ED financing when your claim is authorized and approved. In effect your are factoring or discounting the SR ED claim .
In summary, Canadian firms eligible to file a SR ED should do so. What firm would not want to receive a cash non repayable grant from our friends in Ottawa! If you can wait for the money, great, if you wish to arrange interim financing for your claim enlists the services of a trusted and credible SR ED financier. In a matter of a couple of weeks (why wait a year?) your working capital and cash flow will be augmented Vis your SR ED financing. That's a good thing, and a great Canadian alternative financing strategy.
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