I find that companies are in one of four different scenarios when looking for SR&ED financing.
A major event occurs which requires an urgent injection of cash
Perhaps you have a large PO, a large sale, a request for proof of concept, a loss of a significant customer, a need to hire employees, or other unplanned events. Lenders prefer to finance companies who have a “good problem.” If a company needs to hire people to deploy a solution for a committed contract, it is clear that there is a short-term issue that will be rectified once revenue is generated.
Sales are taking off and the founder wants to double down but not give up equity at the current valuation
Here I find that companies know they need to raise a significant amount of capital and the smart founders delay the raise via bridge financing to increase the valuation and reduce the dilution. The faster the company is growing, the more pronounced the effect. We also see companies raising equity and finding that it is taking longer than they hoped to achieve the goals they had set. Bridge financing allows them to negotiate from a position of strength.
Product development or revenue is taking longer than expected and additional cash is needed to get to the finish line
Everyone has been there – development is taking longer than expected and the delays are causing cash-flow challenges. Whatever the reason for the delay, there is a need to bring in more cash so the company can finish the product and release it. SR&ED financing is an excellent way to accomplish this as it is a fast and simple method to raise short-term capital and improve liquidity.
A cash shortfall is projected and a SR&ED loan is the best way to bridge the gap:
Some companies know there will be a shortfall in cash in a number of weeks or months from now and proactively plan to mitigate any negative consequences by securing a bridge loan. This advanced planning is music to a lender’s ears. As long as there is a clear plan to reverse the declining cash position after the bridge loan, most lenders will provide SR&ED financing.