You wake up everyday and look in the mirror and say, “I am a capitalist.” You have The Wealth of Nations on your bedside table. But in tough times, smart people look for handouts from the government. $700 billion worth of bailouts has even made it socially acceptable!
In Canada, almost $2 billion (just .28% of the US bailout) is granted annually to companies doing R&D via the SR&ED program. Most provinces also piggy-back on this program and provide additional funding of their own. For (Canadian) startups, these subsidies mean cash in your pocket because they come in the form of refundable tax credits. This means you still get money back even if you aren’t profitable, which you probably aren’t. In Quebec, for example, the combination of federal and provincial tax credits means you could get 80% of your developer salaries refunded to you. That $80k developer really cost you $16k!
What’s the catch? First, you won’t get your refund until after you spend the money. You file for your SR&ED tax credits at the end of your fiscal year and after 4-6 months of “processing” you receive a check in the mail. So what’s the use of a refund on expenditures if you can’t afford the expenditures in the first place? Good point and one that the lending market still hasn’t quite solved yet. But you can turn a potential tax credit refund into cash in the following ways:
- If you have a good balance sheet and a some personal assets, you might find a bank to loan you a portion of your expected SR&ED refund in advance. Honestly, if you’re a pure startup this will be very difficult because the bank cares more about your real assets than a future tax credit. Some government programs will provide loan guarantees which can help you get that bank loan. But banks are notoriously conservative about even taking on a tiny amount of risk (anyone out there with some stories they’d like to share?).
- If you have finished your year-end there are now some secondary lenders who will loan you a % of your SR&ED refund for the 4-6 months it should take to get your check. These guys are expensive (1-2% per month) but they might be your best/only option. I know of two who advertise their services: Goldeye Capital and R&D Capital. I haven’t worked with either personally.
- Many investors highly value the cash flow that SR&ED tax credits bring and might be convinced to invest more dollars, using your future tax credits as collateral. I’ve done this several times myself and it usually works out well for everyone because, unlike banks, investors know people who can claim the tax credits even if your startup, gulp, isn’t around to collect.
Canadian startups need to be very familiar with government programs given the economy and the relative lack of startup capital we have in this country. Next time we’ll talk about other programs that exist including Quebec’s new e-business tax credit and some of EDC’s funding programs.