Tax credit financing companies typically look at 4 different stages of the lifecycle of a tax credit:
- Corporate taxes filed with the CRA
- Fiscal year end passed but taxes not filed
- Accruing tax credits during the year but have not reached fiscal year end
- Forecast to be accruing tax credits in the future
At each stage there is a different risk and some lenders offer different amounts for each stage.
Let’s start with the end of the spectrum where your company would like $1M in financing and you have a $700k SR&ED claim. You have just finished your fiscal year-end. Some lenders will loan you based on the $700k. Others will allow you to borrow based on the accrued $700k plus a forecasted $700k. That’s right – they will lend you money based on your forecasted SR&ED qualifying expenditure. Most of the time, if the lender offers 75% loan-to-value on the accrued SR&ED, they will offer a lower loan-to-value on SR&ED that is forecast to occur in the future. Often the loan to value is in the 50% range for future SR&ED. In addition, the lender will want to see a track record of similar size claims or a good reason why the future claim will materialize. This is often the case for longer-term R&D projects in which it is quite certain that significantly more effort is required to find a solution.
At the other end of the spectrum is a company which has already filed its SR&ED claim and is looking to finance a portion of it. The lender will have to move quickly so that the funding can be in place well before the refund. In these circumstances, the loan to value is often 80% or above. In addition, there is typically a minimum interest period which can range from 2 to 6 months. It is in everyone’s best interest that the loan be outstanding for at least 2 months. It’s not economical for lenders to have extremely short duration loans. It also doesn’t make sense for borrowers to take on a debt obligation for a very short period.
In the middle of these extremes is accrued tax credit financing, either before or after the fiscal year end. All SR&ED lenders do this all day long and offer competitive rates.
One question to ask is how much do you want to borrow without putting the company at risk.
In my experience, if you need to borrow significantly more than your SR&ED claim and have no other alternatives, you are probably asking for too much money. Every circumstance is different, but lenders will want to be assured that there is a runway that can assure them that the company will accrue SR&ED in the future. This oftentimes means committed equity or revenue. Lenders are not in the business of taking equity-like risks. This is why my suggestion is to raise a bit of equity and a bit of debt simultaneously.
Another option SR&ED lenders employ is to provide a borrowing base equal to 2X your current SR&ED claim with multiple disbursements. Therefore, you don’t get all the money at once. In fact, you may never draw the maximum borrowing base if your research & development declines or there are other material changes in your business. That said, having a high borrowing base with multiple disbursements is a good way to minimize interest payments while maximizing flexibility.
In summary, yes, you can borrow based on the SR&ED credits that have not been earned. A lender will take a holistic look at the business. And so you can sway them by increasing revenue, a robust accounts receivable, or any number of other factors. Work with your lender to structure a facility that gives you the most flexibility while meeting your business objectives. If you’re looking to finance your SR&ED claim, contact us at Venbridge and we’ll be happy to help you.