Guide to SR&ED Loans for Canadian Tech Companies
(Updated Oct 2019 with new lenders)
The Scientific Research and Experimental Development Tax Incentive (SR&ED) is a staple in Canadian startup financing. It can provide an annual cash infusion for qualifying tech companies.
But the lag from filing a claim to getting cash can be long: 12–18 months isn’t uncommon.
As a result, a cottage industry has sprung up of lenders who bridge the gap between filing SR&ED the claim and receiving the refund from the government.
In some cases, you can even get cash advanced before you file the claim, based on what you accrue during the quarter.
SR&ED loans have been a popular conversation topic amongst other tech CEOs in my network, for two main reasons:
- Audits by the Canada Revenue Agency (CRA) are becoming more common, and
- Delays in payouts are getting longer.
Having spent considerable time talking to institutions, private lenders, and shareholders, here is what I’ve learned about the options that exist.
1. Institutional SR&ED Lenders
|Name||Fees + Interest||Min Facility Size||Max Facility Size|
|Old Kent Road||28.80%||$30k||$4M|
|Easly (fka Rapid Capital)||13%||$50k||$2M|
|Kelowna Family Office||26.30%||$50k|
|North Innovation Fund|
The full table, with more data, is available as a Google Sheet:
SR&ED Lenders with the Lowest Rates
If you’re looking for the lowest rate, you’re probably better off building a consortium loan from existing shareholders (see below on what to expect from shareholders). If you opted for an institutional lender, Easly or RedLane would be the first two companies I’d talk to, at 13% and 12% respectively.
BDC might be worth a conversation also, although I suspect the turn around time to a) find the correct BDC rep to speak with, and b) get an answer would be longer than a more nimble, smaller firm could provide.
Biggest Facility (aka VC replacement)
If you have the profitability to support it, I’d look at Finalta or Espresso for a large, combined venture debt facility with the best terms. Espresso, one of the original SR&ED lenders on the scene, advertises that they can fund 24x MRR, with loan facility sizes up to $15M, and they also advertise that they will fund 100% of a claim in advance.
Finalta advertises that they will fund SR&ED on accrued basis, but in advance of the actual accrual. I take this to mean that they are really funding on “estimated accrual”, as they wire funds for the upcoming quarter on the 1st day of the quarter.
In theory, Old Kent Road (“OKR”) would be a fit as well, with a listed max facility of $4M, but their total effective rate as advertised is one of the highest of the group. It doesn’t seem practical to borrow at such a high cost of capital. One presumes that if you were getting a $4M facility there might be some room to negotiate on the interest rates, but I don’t have any data to show what it would end up being.
Lenders with low minimum sizes
Lenders seem to be moving upmarket, and anecdotally I’ve seen other venture debt providers (notably MRR lenders) increase their minimums repeated over the last two years.
If you take Espresso as an example, they’ve grown their minimums 4x over 3 years:
- 2019 (today): $1M – $15M facility size as per their website
- 2018: $500k – $35 as per regulatory filings
- 2016: $250k – $3M as per regulatory filings
Given this, OKR’s $30k minimum facility size seems to serve a slice of the market that the other lenders aren’t targeting.
What about the Big Banks?
Most of the big banks, including RBC, CIBC, and SVN, offer combined debt facilities that wrap up MRR, SR&ED and similar financing together. In general I’ve found their minimums to be high (eg. CIBC requires $250k MRR as a starting point), and their MRR multiples quite low (eg RBC is 4 – 6x).
If you are large, profitable, and have an existing relationship with a big bank, it might be worthwhile to ping them for details, but I’d expect the specialists to have more flexibility, particularly for earlier stage companies that aren’t profitable and focused on growth.
What terms to expect
We typically lend up to 65% of the credit value.
We can lend against accrued (typically quarterly) and filed SR&ED.
Interest options would be to have simple monthly interest if paid monthly or compounded if you prefer to wait until the SR&ED credit is received
One advantage from institutional firms is the option to pay out quarterly or monthly, based on what gets accrued in that term. This means you can advance cash without waiting to file your SRED claim to be filed, greatly increasing the time to getting cash in the bank.
2. Private SR&ED Lenders
Folks familiar with SR&ED financing may band together and finance the refunds on their own. The market rate is a bit cheaper, as there’s less over head to deal with.
The market rates seem to be:
– Interest rates between 12% — 17%, with the average around 15%,
– Fixed amount for fees
– Occasionally warrants (a percentage of the loan value) as a sweetener
I’ve found that private lenders tend to be successful entrepreneurs who have used SR&ED themselves, or investors in debt funds like Espresso or OKR.
3. Existing shareholders
The most straight forward option for financing your SR&ED claim is to go to your shareholders and ask for a loan.
What? Ask your shareholders for a loan? Doesn’t that show weakness?
Not at all. Most tech companies growth-oriented, and the opportunity to get cash earlier than expected can accelerate growth.
Consider the following:
Your individual angel / seed investors have given you money that they will very likely (9 times out of 10) never see again. If they do see a return, it won’t be for many years down the road.
Say you were to propose an investment opportunity to them:
- a short term loan (measured in months)
- secured against receivables from a AAA-rated central government (the Government of Canada)
- at an interest rate that’s twice what they could get in the stock market, and
- with a company they are already familiar, and who they have probably already done extensive due diligence on
Compared to their angel/seed investment, it seems like it would be hard for them to say no to such a great opportunity!
Plus, many early stage investors get satisfaction from helping out and keeping a hand in the game. It’s a win-win to give them the opportunity to loan you some cash.
What are your experiences with financing SR&ED refunds?