A capital injection for a business can be the difference between growth, innovation and a bright future, or stagnation, downsizing and even bankruptcy. Yet according to a study by the New South Wales Business Chamber, 20% of business owners who need funding 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 small and medium-sized enterprises (SMEs) were declined loan applications due to inadequate security.
Nearly a third of businesses missed an opportunity due to lack of credit and 55% of those that had loans rejected reported that it significantly constrained their growth.
Yet, according to the Australian Bureau of Statistics, access to capital is the most common barrier to innovation, especially for the SME. So 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 was agreed in 2010, banks have been required to more than triple their reserves from 2% to 7% by 2015. By 2019 this could increase to 9% with the net effect that less money is available to lend.
Here are some of the common challenges facing SMEs seeking capital from banks.
Complicated, slow, manual applications and approval processes. It can take weeks to prepare the information required, then banks can take weeks to make a decision.
In the majority of cases, business 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. And full security requirements can limit options later.
Traditional sources of funding require a sustainable history of revenue to support a credit decision. It tends not to exist for volatile or pre-revenue companies. A start-up may not be able to show a track record of paying back loans when their business has just started.
Alternative capital 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 several grants, incentives and programs to help establish and develop businesses. The key one is the research and development (R&D) tax refund. This program is a lifeline for many Australian businesses undertaking R&D and provides the necessary assistance for them to research and develop. But in many circumstances the tax refund, as it is currently implemented, doesn’t go far enough to meet the needs of the business.
The refund 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 refund doesn’t bridge this gap in sustainable capital.
So, where can SMEs find sustainable capital?
Introducing quarterly R&D tax refund advances
Radium Quarterly Advances on the R&D refund enable 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 (ATO). 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 focus on their R&D projects.
A Radium Quarterly Advance brings forward the 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. It can solve critical cash flow problems for companies undertaking R&D.
Qualifying for an R&D advance
To qualify for a Radium Advance, companies will need to register their eligible R&D with the Department of Industry, Innovation and Science within 10 months of the end of their company’s income year.
Businesses 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 ATO.
For more information on the R&D tax refund head to business.gov.au/Grants-and-Programs/Research-and-Development-Tax-Incentive