Five considerations for funding innovation and R&D finance

Did you know there are five steps to funding innovation successfully that are particularly relevant if you’re also weighing up R&D finance? During our seven years of R&D lending, our business has grown exponentially. And our market presence and staying power have afforded us the privilege of engaging with all types of innovation-based businesses. This vantage point has given us many valuable insights into all types of innovation funding. Drawing on these years of experience, we’ve pinpointed five considerations for funding innovation. We recommend every innovation business weighs these up before accessing their R&DTI refund early with R&D finance or pursuing other types of capital. And we’re going to unpack them for you in this blog.

What is R&D financing anyway?

In a nutshell, R&D financing is a capital advance on your company’s expected R&D Tax Incentive (R&DTI) refund from the Australian Tax Office (ATO). Created by the Australian Federal Government in 2011 and administered by AusIndustry and the ATO, the R&DTI supports innovation. The refundable component of the incentive gives eligible businesses 43.5 cents for every dollar invested in eligible R&D. And the program’s goal is to support innovation that would otherwise not have happened. The generous scheme has been a tremendous success. Indeed, the ATO’s recently published transparency report revealed that 11,545 companies lodged $11.2 billion in R&D tax incentive claims during FY 21-22. But the R&DTI has a weak spot. It can take up to 18 months for R&D refunds to arrive from the ATO. And that’s where R&D financing comes in.

Leading the way

Delays of more than a year or multiple months are an aeon in cash flow and go-to-market terms. R&D finance connects innovators with their refunds sooner, bridging the cash-flow shortfall and accelerating their R&D. Radium Capital burst onto the R&D financing scene in 2017, and our streamlined processes and dedicated funding pool enabled us to lend at scale and grow exponentially. Seven years into our growth journey we’ve deployed more than $800 million of funding to support cutting-edge Australian innovation and become the market leader.

Now that we’ve completed that quick history lesson on the R&DTI and R&D financing, let’s look at the five factors to consider when exploring funding for innovation.

1. Size up your capital stack

What does your capital stack look like? Is it diverse with many different types of funding to support your business? Or are you reliant on one or two capital sources to sustain your cash flow? The rule of thumb with capital stacks is the more diverse, the better. But when assessing how diverse your sources of business funding are, it’s crucial to ensure you size up your stack properly. The key to diversity in this context is having different types of funding, for example, personal savings, government grants, equity funding and debt finance.

Top tips

When assessing your capital stack, look at whether your capital sources complement each other or restrict or exclude other sources of funding. The less restrictive your funding sources are, the more diverse your capital stack can be, and vice versa. Another key consideration is to factor in the stage your business has reached. If your business is scaling up and growing exponentially, then it’s highly likely that all funding options, including R&D financing, will be available. While venture capital and bank loans may be hard to come by if you’re running an early-stage start-up, R&D financing could be on the table. Indeed, the beauty of R&D financing is that adding it to your capital stack is an option at almost every business stage. For more information about matching your company’s growth stage to funding options, read our article, Funding tips for every stage of the start-up journey.

Extending your capital stack

Within your capital stack, debt financing options will tend to be limited because many types of debt are secured against the company or the founder’s finite assets. Different lenders don’t want to fight over the same piece of the pie if you default. So, they may decline your loan application if you already have secured borrowings.

The exception is a Radium Advance. It’s typically secured against your company’s expected R&DTI refund, which means your business can still access other types of lending. Our robust tried and tested systems, as well as our longevity and experience in the marketplace, allow us to offer this to our clients. And this frees them up to access other types of capital. However, many R&D financiers not only require your expected R&DTI refund but other security too. To find out more about capital stacks and how to create a diverse one for your business, read our article, How to build the best R&D capital stack for your business.

Flexible finance

Regardless of whether your company’s capital stack has debt financing or not, R&D finance can often be added seamlessly. You may not know this, but you can optimise how much, how frequently and when you access R&D financing to match your funding needs. Many of our clients initially access a Radium Advance as bridge capital and then go on to use it strategically as regular cash flow that also enhances their total R&D refund. Others apply for a Radium Advance after their R&D project is finished and use the capital for their product launch. To learn about the different ways to deploy R&D financing in your business, and how this funding can keep your goals on track, read our article, How to leverage debt financing at every business stage.

2. Consider the true cost

One of the most overlooked considerations for funding innovation is cost. When founders and business leaders consider the cost of funding, they’re often tempted to look at the upfront cost rather than the total lifetime cost of funding. If you only consider the upfront costs of capital, then equity funding wins hands down because it’s free at the point of delivery. However, in exchange, you give up a share in the ownership of your business and, in many cases, control over how your venture is run. What can seem like a sweet deal, in the beginning, can leave you short-changed when it’s time for you to exit.

Read the fine print

Don’t make the mistake of giving away too much of your business. And try to avoid dishing out equity to investors too early in your growth journey. You’ve worked hard to build it and it’s only fair that you reap the rewards. The upfront costs of debt funding such as bank loans or R&D finance can look pricey. But compared to equity funding, debt financing can be much cheaper in the long term. That said, not all debt financing is equal. So make sure you’ve read the fine print and that you’re across the details when it comes to the interest, fees, charges and repayment schedule.

3. Find out about assets & security

Debt financing over larger amounts often needs to be secured against your business or personal assets. So, it’s vital to understand how much you need to borrow to achieve your goals, and which assets you can use as collateral.

Assets

Assets come in different forms and can be broadly categorised as current or fixed. Examples of current assets include accounts receivable, while examples of fixed assets are plant and equipment and buildings. It’s your company’s fixed assets and your personal fixed assets, such as your family home, that lenders will want to use to secure certain types of borrowing against. If you default on your loan, the financier can seize the assets used as security to recover their funds.

It’s easy for start-up founders and leaders to become overly focused on raking in as much capital as possible. Research and development and getting to market are expensive exercises. But try to stay focused on your goals — short-term and long-term. Let these guide your funding requirements. This will help your business avoid being too highly geared, risking assets unnecessarily or bringing in outside investors too early.

Security

It’s standard practice for lenders to lodge your borrowing on a Personal Property Securities Register (PPSR) in case you default. In some instances, PPSRs, and other types of security can prevent or limit your access to other types of lending. So we highly recommend knowing your position on security on any current or planned loans. If you do hit a road bump with security, we recommend talking with your lender to see if they are open to working with other financiers or granting you a deed of partial release on a PPSR.

Security for R&D finance

R&D financing is usually (although not always) secured against your company’s expected R&D tax refund. Like other lenders, R&D financiers will tend to lodge your R&D loan on a PPSR. Check with your R&D financier what type of security they take and how they handle the removal of PPSRs. What might seem like a minor administrative issue could stop you from accessing other types of financing or switching to a different R&D financier.

4. Weigh up equity & dilution

Equity and dilution go hand-in-hand. You can’t have one without the other. And how you are going to balance them are important considerations for funding innovation in your business. Deciding whether to seek equity funding is closely linked to several factors. These include the stage your venture has reached in its growth journey, the amount of money you need for your business goals, the market for your product, and your tolerance for dilution.

While equity and debt funding complement each other and can readily be mixed, check if you need to consult your investors before signing any loan documents. And that includes R&D financing. Although, it’s worth noting that R&D financing is usually welcomed by investors, such as venture capitalists for two key reasons. It’s a self-resolving debt for starters, that is repaid once your R&D refund arrives from the tax office. And it stabilises your company’s cash flow, which goes down well with most backers.

5. Think about ease of access

How quickly do you need debt or equity funding? And how much time can you and your team dedicate to attracting and reeling in investors or applying for a loan? Answering these questions is important. It will help you determine which type of funding is right for your business stage and needs, and if R&D financing is the right capital for you.

R&D financing is a fast form of financing compared to attracting investor capital and accessing other types of debt finance. So if you need money sooner rather than later, it’s a good option. Remember to check that your business and R&D are eligible for the R&DTI refund before you apply. And when it comes to deciding which R&D lender to choose, we recommend consulting your innovation ecosystem and communities. Do your peers use R&D finance? And what do they say about the application, approval, and repayment processes with their R&D lender?

Explore your options

Turning your attention to the five considerations for funding innovation is essential for your business. Weighing up which funding options to add to your capital stack, and whether to apply for R&D finance are important decisions. But it’s a choice you don’t have to make alone. Our R&D finance experts are available to you for a no-obligation chat. Our team has our next milestone — $1 billion in R&D lending — within reach. So you can be sure your business is in safe hands.