SR&ED Factoring is a method of using a SR&ED tax credit claim to help finance your venture. For any business that does research and development, there is probably a lot invested in the budget behind these activities. In many cases you may want to receive the benefit any tax credits now rather than later. If you are filing for a tax claim that includes a prior year (you have up to two years to claim a SR&ED tax credit) that may mean you are getting double the amount of the original tax credit at the same time. This can be a significant amount of cashflow you can take advantage of immediately.
The process of factoring may also be described as “discounting the claim”. The best time to take advantage of this form of financing is when current assets such as accounts receivable do not provide enough cashflow for the working capital your firm may need. Another common form of factoring is when a firm approaches a bank with its accounts receivable and obtains financing based on funds receivable. As a rule, banks are not favorable to SR&ED tax claim credit financing, because of the uncertainty around the approval of the credits, and their limited knowledge of technical and engineering issues.
Typically a firm can get 70% of the tax credit now, and the financing is structured with no principal or interest payments on the SR&ED loan until the approval of the claim. After the claim has been approved, the remaining 30% is released, and financing costs are assessed and charged at this point in time. Overall, SR&ED Factoring is designed to inject cash when a company needs it most and time is of the essence, with financing costs placed into the payment schedule at the end of the period.
Because the SR&ED claim itself is the collateral for the financing, even a firm that is in a pre-revenue state can take advantage of this strategy. It can be beneficial to companies that have other financial challenges as well, and terms can often be negotiated.