SR&ED Loans for Startup Cashflow 🇨🇦

(Updated Dec 2018 with new lender ‘Rapid Capital’)

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 Lenders:

A quick google search shows most of the big players. Noted are the interest rates, though your mileage may vary.

  • Espresso Capital: 19%, $250k minimum, can move quick (2–3 weeks). Espresso has a good reputation among tech CEOs, and they were one of the first SR&ED lenders on the scene
  • Vancity: 11.5% — 15.5% + 2% fee, $75k minimum
  • CAE Capital: 13% — 17%
  • OKR Financial: 1.9% — 2.4% monthly, $30k — $4M check size
  • BDC: Rate 9%, but beware: would require a PG, meaning you (or another principal at your firm) would hold the risk of the loan.
  • Rapid Capital: New lender on the scene, backed by US money and based in Toronto, rates are around 12% interest + 1% fees and advertise a quick (few weeks) turn around

Some sample 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 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?