It’s Time For SMEs To Take A Close Look At Alternative Funding

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A financial injection to a business can be the difference between growth, innovation and a bright future, and stagnation, downsizing and even bankruptcy. Yet according to a study by the New South Wales Business Chamber, 20% of business owners who need finance do not apply for bank loans because they find the process too difficult or too time-consuming.

The study also found that after applying through traditional banking channels, 37% of SMEs were declined loan applications due to inadequate security. Thirty per cent of businesses missed an opportunity due to lack of credit and 55% of those who had loans rejected reported that it significantly constrained their growth.

Yet, according to the Australian Bureau of Statistics, access to finance is the most common barrier to innovation, especially for small to medium-sized businesses.

Clearly, something is broken in the way businesses access finance. Why does small business struggle to access capital via traditional sources?

Less capital available from banks
Since Basel III, banks are required to more than triple their reserves from 2% to 7% by 2015. By 2019 this could increase to 9%. The result – Less money is available to lend.

Information Gap
Complicated, slow, manual application and approval process. Takes weeks to prepare information required, then the banks can take weeks to make a decision.

In the vast majority of the time, property is required as security and often it is not available. New business owners generally have very little collateral, unless they rely on personal assets. In addition, full security requirements can limit options later.

Traditional sources require a sustainable history of revenue to support credit decision. This is not always achievable in a volatile or pre-revenue company. It is not possible for a start up to show a track record of being able to pay a loan back, when their business has just started.

Alternative funding options encourage innovation
While banks can’t be expected to fund every request for investment dollars, the fact the system is constraining innovation is not a great outcome for either the businesses concerned or for the wider economy. The answer is to provide alternative financing options for SMEs.

The Australian Government offers a number of grants, incentives and programs to help establish and develop businesses. The key one is the R&D Tax Incentive. This program is a lifeline for many Australian businesses undertaking R&D and provides the necessary assistance to research and develop. But in many circumstances the incentive, as it is currently implemented, doesn’t go far enough to meet the needs of the business.

The incentive is paid at the end of the tax year and is designed to reimburse some of the costs associated with R&D. But thousands of Australian businesses are completing or embarking on R&D programs with limited capital resources. While running their business and focusing on R&D programs, these business owners also face a battle to find sustainable capital because they are often not yet generating revenue and are making a loss. The tax incentive doesn’t provide that.

So, where can these businesses find sustainable capital?

Introducing quarterly R&D Tax Incentive advances
An advance on your R&D tax incentive refund enables a company to access sustainable quarterly capital injections, rather than waiting up to 18 months to get a lump sum refund from the Australian Tax Office. This provides a pathway for companies who may be loss making or pre-revenue to receive a scheduled cash injection, take the worry out of obtaining funding, and allow these companies to focus on their R&D projects.

An R&D tax incentive advance provides a quarterly advance on money spent in the previous quarter, which can be reinvested straight back into further R&D. For a small company, this has a huge impact on cash flow and total working capital requirements and can solve critical cash flow problems for companies undertaking R&D.

Qualifying for an R&D advance
To qualify for an R&D advance, companies will need to register their eligible R&D with the Department of Industry, Innovation and Science and do so within 10 months of the end of their company’s income year.

Companies must also:

Have an R&D program registered with Ausindustry
Use a Radium approved accounting firm for R&D assessment
Have no outstanding tax liability
Not be the subject of any investigation or audit by the Tax Office.
For more information on the R&D Tax Incentive head to

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