Australian companies are still mostly unaware that they could be accessing a relatively low-cost form of finance, early on in their journey, when most debt finance is not even on the table yet.
Most Australian startups are heavily dependent on two major sources of funding: bootstrapping or equity finance. The first one requires the company to be revenue-generating early on or also have a founder with deep pockets. The second one is dependent on the founder’s ability to sell their dream to seasoned investors through laborious pitches, long meetings, and intricate due diligence processes.
For companies that need to invest a lot in technology, generating revenue early is almost an impossibility. Further, you have to have a product to sell a product, and if R&D is still the main preoccupation of the company, then convincing investors to part with cash becomes the main job of the founders.
R&D finance can be a third tool in the startup founder’s toolbox and it also offers immense advantages.
What is R&D finance?
R&D finance uses the R&D tax incentive credit as collateral for a debt facility that the company repays easily once the funding is in from the ATO. Though this tax incentive is fairly consistent and predictable for most companies, the issue is that it is very slow to be paid out. For a company to receive the tax incentive payment it is due it has to jump through a few hoops and wait many months. The typical timeline has a company that incurs costs with R&D for a whole year, files its accounts as part of their annual tax return and then waits up to 12 more weeks for the claim to be reviewed and paid out.
However, with R&D finance, this process is simplified and sped up.
The company has access to the funds many months before the ATO could pay out the funds, in the year that the spending is still occurring. This makes it possible for the company to draw on its tax credit to reinvest in R&D, thereby increasing the size of the tax credit at the end of the year and offsetting fees. It’s as close to magic as it gets in the world of startup funding!
Who is eligible for an R&D debt facility?
To be able to qualify for R&D lending, it is necessary to qualify for the applicable tax incentive first. The legislation sets the parameters of what is included in the R&D incentive and applies to companies that spend over $20,000 in one year. The ATO’s legislation says:
“To be eligible for the R&D Tax Incentive you must:
- Be a company that is liable to pay income tax in Australia.
- Conduct at least one activity that meets the
legislated definition of a core R&D activity.
- Core R&D activities involve at least one hypothesis guided experiment that is undertaken to generate new knowledge.
- Other non-experimental activities that directly support a core R&D activity may be eligible as supporting R&D activities.”
If the company can file for an R&D tax incentive loan in line with the ATO’s guidelines, then, depending on the size of the expected tax credit, the company is eligible to apply for R&D finance.
R&D lenders will work closely with R&D tax incentive advisors, so it is crucial to find an advisor that is experienced with both filing claims and preparing documents for R&D finance.
Companies like Fundsquire have a series of additional qualification criteria that a company must match before they can offer a debt facility. Overall the factors that an R&D finance company is sensitive to could be the size of the expected grant, the company’s exposure to government debt, any securities over the business or serious liquidity concerns in the next 12 months.
R&D finance is not just limited to businesses working out of Australia. Around the world, governments have chosen a proactive approach to encourage research and development. Wherever your business is registered if you are investing in R&D, chances are that you are eligible for a tax credit and financing. At least in the English speaking world, R&D finance is starting to gain ground, with, for example, tax credit loans in the UK, or SR&ED finance in Canada.
Conclusion
For companies in technology or research that invest a lot of their money in innovation, R&D finance can be a great help in accelerating towards their goals and overtaking the competition. Adding debt funding into the mix early can optimise a company’s cost of capital, also making sure that the founders do not unnecessarily need to part with too much equity too early.
