Canadian lenders lend to US companies and US lenders lend to Canadian companies. In general, this provides a healthy ecosystem for lending. However, it is important to keep in mind that, generally speaking, the US is far more litigious than Canada.
Firstly, I want to focus on the lenders for SR&ED in particular. US banks and other lending institutions from the US are not included in my analysis. This article is squarely focused on tax credit lenders who are based in the US and have representation in Canada as compared to Canadian-owned and operated lenders.
There can be benefits to borrowing from a US SR&ED financing company. If your business has operations in both Canada and the US, it can be easier to attract non-SR&ED financing in the US. Obviously, the US lender who provides SR&ED financing in Canada needs to provide other types of financing in the US.
With competition in the US and the sheer number of financing companies, some US lenders can offer lower costs of capital thereby lowering the cost of the SR&ED loan. If all you are looking at is the cost of capital and you can live with some of the downsides, a US-based lender may be a good alternative.
Recently, the US has slapped massive tariffs on foreign countries, renegotiated NAFTA and made immigration of technically skilled workers much more difficult. On the contrary, Canada has not taken a protectionist stance. However, as a Canadian entrepreneur, with everything else being equal, would you rather support a Canadian company or a foreign one? By supporting other Canadian companies we build a stronger country and help grow the economy.
Consider the motivation of a US company to expand internationally
We have all heard stories of US companies pulling out of Canadian markets entirely when things don’t go as planned. There is simply more risk in dealing with a US firm that expands into Canada as they may decide to close up shop one day. This happened in the last financial crisis when many Canadian subsidiaries were shut down. This was not because of their performance in Canada, but because of the economic turmoil in the US.
According to a Harvard Law School research paper published in 2010, the US has a litigation rate of 5,806 suits filed per 100,000 people while Canada has a rate of 1,450. In addition, the USA has 391 lawyers per 100,000 people while Canada has only 26. Therefore, you are four times more likely to face a lawsuit in the US than in Canada. This is probably the biggest risk Canadian SMBs face when working with US lenders. Everyone plans for the loan to be repaid on time, but what if something goes wrong? will your lender work with you to put together a plan that works well for both parties? Often times US companies turn to the legal system for resolution when problems arise as compared to Canadian companies who work together to come to an amicable solution. Because the CRA review process can be unpredictable, if your SR&ED claim is significantly reduced, or denied, facing a legal battle with a big US lender can mean the end of your dream and your company.
In summary, borrowing from a lender based in the US can make sense for some Canadian companies. However, you must be aware of the less immediately obvious potential risks when looking at the term sheet. Do your research to ensure the lender is reputable and will stand by your side even if there is an issue with the loan.