SR&ED Tax Credit Financing - 5 Things You Need to Know

As a Canadian business owner or financial manager your company should be taking advantage of Canada's SR&ED (also pronounced sred) program for tax credits. The most obvious benefit of this program is that monies advanced to your firm are in the form of a non repayable grant. We tell clients you can't get any closer to the concept of 'free money' in Canadian business that the SRED program.

Did you also know that you can turn that 'grant receivable' into a sred loan as soon as you file your claim - in fact in some cases with the right consultant you can generate funds even before you file!

Let's explore 5 Key Things you need to know about SRED Finance

1. it's a specialized finance - more on that later

2. If you have a claim you can finance a claim - it's as simple as that

3. You can generate approximately 70% of the total value of your sred claim (combined federal and provincial portions) as immediate cash flow under a Sr&Ed financing or a sred factoring scenario

4. The time to complete a sred financing is usually two to three weeks - the sooner you start and plan the better

5. SR&ED Tax credit financing does not add debt to your balance sheet - your financing is collateralized by the sred itself

Let's clarify all those additional points in more detail so you can be well equipped and informed to consider a sred financing.
A sred loan is clearly something that anyone outside of the sred environment hasn't even heard of - and for the portion of Canadian business that does take advantage of sred claims we can assure you a good portion of that business population doesn't even know you can finance of ' discount ' your claims . It's more or less like selling a receivable that is due your firm -you are simply receiving the cash now.

In Point # 1 we talked about sred finance being specialized - you should clearly seek out and speak to a sred business financing advisor. That will allow you to understand the basics, determine how much you can receive based on claim value, and work through a basic application to get your transaction financing. A Sred loan should be really just viewed the same as any other business financing - getting back the usual application forms and our clients quickly understand that the essence of the financing doesn't necessarily revolve around rations, covenants, outside collateral , etc, but in fact focuses on one item -your Sr&Ed claim itself .

Point # 2 revolves around the financing of your actual claim. Any claim is financeable, but we caution client that this type of financing makes more sense when it involves a claim in excess of $ 200,000.00 - That should not deter smaller recipients, small claims can be filed, but in reality they make less economic sense for the lender .

In Point #3 we referenced 70% as a guideline for most of sred financing in Canada. So what about that other 30% - lets clarify that. Your firm is advance 70% of the claim on filing - the other 30% of course still belongs to you. That amount is more or less viewed as a 'holdback' which helps carry some of the financing costs, and also covers off any possible downward adjustments that Ottawa might make on our claim adjudication. As SRED participants know your claim is viewed from both a financial and technological point of view.

Point # 4 involves of course the favorite questions of most clients - how soon can we get the funding?! As we stated, with your full co operation on providing copies of your claim, info on who prepared it, as well as basis business financing application criteria, you can receive funds in two to three weeks. Most firms are pleased to know that sred financing in Canada does not involve 'payments 'on the loan. In some ways the term Sr&Ed loan is a misnomer because it is really the factoring or monetization of your Sr&Ed receivable .Therefore you simply receive the funds and financing costs are deducted from the back end when Ottawa processes your claim and cheque.

As we have already stated the sred tax credit financing does not impact your financial statements, other than of course allowing you to put to use valuable cash flow and working capital as a result of the financing.
Consider a sr&ed tax credit financing when it makes sense to access additional working capital and cash flow and when you don't want to wait for your funds over a long period of time!