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Unlocking Cash Flow Potential: A Comprehensive Guide to SR&ED Financing

SR&ED financing is not merely an alternative funding option; it's a strategic financial instrument that enables you to manage your cash flow predictably. By partnering with the right SR&ED financing provider, you can unlock your earned credits and steer your business toward long-term stability and success.

October 17, 2023

A crucial part of keeping Canada globally competitive is incentivizing companies to conduct their research and development (R&D) projects domestically. To that end, the federal and some provincial/territorial governments offer generous tax credits to companies with eligible R&D expenditures. The federal program is called the Scientific Research & Experimental Development (SR&ED) Tax Credit Program (learn more about it here), and it provides approximately 20,000 companies with over $3B in tax credits every year. About half of those credits are refundable, meaning you can earn cash back even if you're pre-revenue.

While incredibly valuable, the program only disburses refunds annually, which isn't conducive to the cash flow needs of growing companies. Luckily, there's a strategic tool they can use to access the value in their earned credits at any point throughout the year > SR&ED financing.

Why Use SR&ED Financing?

SR&ED financing allows you to monetize your earned SR&ED tax credits when it suits your needs, effectively turning them into a reliable source of cash flow. You can access cash at strategic points throughout the year rather than wait for an annual refund from the CRA. This flexibility is particularly beneficial in today's tight capital environment, where VC deals have slowed, and traditional debt is becoming increasingly expensive.

How SR&ED Financing Works

To illustrate the cash flow benefits SR&ED financing provides, let's walk through an example. Consider a hypothetical Ontario-based company engaged in eligible R&D activities. For the company's eligible expenses, they earn a 35% federal and an 8% provincial refundable tax credit. In this example, we'll assume that the company is spending on eligible work evenly throughout the year. The company's SR&ED tax credit accrual and refund timeline would look something like this:



Instead of waiting for an annual lump sum, the company can opt for SR&ED financing to receive advances on up to 75% of its earned credits, thereby aligning the funding timeline with its operational needs. The chart below illustrates what the cash flow would look like if the company used SR&ED financing every quarter:



*In this example, we assume a 2% disbursement fee and a 14% annual interest rate on the loans.

Using SR&ED financing every quarter provides the company with predictable cash inflows it can put to use throughout the year. Examples are handy, but how would SR&ED financing benefit your company directly? Our partners at Easly, a leading SR&ED financing provider, developed a Cash Flow Calculator that helps you estimate what you can access using SR&ED financing. If you need some help determining your expected SR&ED refund, Easly also has an SR&ED Refund Calculator you can use to see the approximate size of your refund.

Key Features To Look For in an SR&ED Financing Provider

If you're ready to improve your cash flow by leveraging your earned SR&ED credits, you'll need to find a trusted SR&ED financing provider to work with. There are a few things to consider when selecting an SR&ED financing partner:

  • Free Application: Your goal is to improve cash flow, not incur additional costs. Find a provider that doesn't charge you just to submit a funding application.

  • Clear and Transparent Terms: Financing terms can be overly complicated. Your SR&ED financing provider should have simple and transparent terms that you don't need a law degree to understand.

  • No Monthly Debt Servicing: SR&ED financing is meant to improve your cash position, not add to your monthly cash burn. Avoid providers that require monthly debt servicing.

  • Quick Turnaround: Your SR&ED financing provider should have the expertise and experience to get you funded fast. Choose a provider that can process your application and get cash in your bank account within two weeks.

Conclusion

SR&ED financing is not merely an alternative funding option; it's a strategic financial instrument that enables you to manage your cash flow predictably. By partnering with the right SR&ED financing provider, you can unlock your earned credits and steer your business toward long-term stability and success.

For more information on how SR&ED financing can help your business, connect with the experts at Easly.