Over the years, several myths have evolved about R&D financing. So if you’ve heard of R&D advances, there’s every chance you’ve unwittingly absorbed a blend of reality and invention. Put simply, R&D finance is a loan that lets businesses access their R&D tax refunds early. But if you’re considering R&D financing as a capital option for your business, it’s vital to separate fact from fiction. To help you do just that, we take a look at the nine most common R&D financing myths our prospective clients ask us about.
Myth 1: R&D must be your only or main business activity
This myth gets down to the brass tacks of eligibility. It’s vital to be crystal clear on whether you can apply for the Federal Government’s R&D tax incentive in the first place. Your business must have at least one core R&D activity that meets the Federal Government’s definition of core R&D. By this measure, your business can have an eligible core R&D program but be involved in other non-R&D activities outside this criterion. Radium Capital client, Quantify Technology is an example of this. There’s also significant leeway when it comes to which types of activities are considered core R&D. Many eligible businesses aren’t doing the type of abstract research you might imagine. Often their core R&D is improving their products or services. Activities classified as supporting activities that relate directly to a company’s core R&D can qualify for the RDTI too. But it’s not mandatory to have these.
Myth 2: R&D finance providers are lenders of last resort
You could be forgiven for thinking if bank loan or capital raising options fizzle, that’s when businesses start turning to R&D financing. In reality, the opposite is true. For businesses in the know, R&D financing, especially a Radium Advance is the go-to capital. Fast approvals, fixed costs and flexibility are three of the advance’s major drawcards. Radium Capital client, FBR, used a precisely timed Radium Advance to fund vital research and optimise its next capital raise. By contrast, Linecrest, swapped its planned annual advance for monthly Radium Advances as part of its longer-term financial strategy.
Myth 3: R&D finance is expensive
Securing steady sources of affordable capital is the number one headache for start-ups and businesses doing R&D. Both the stage and structure of these businesses can be turn-offs for traditional lenders such as banks. R&D finance fills that gap and offers affordable finance businesses can count on.
In a May 2020 SmartCompany article, Carbon Group’s R&D and Grants Partner Maitreya Speering said, “Many organisations have the misconception that R&D finance is an expensive way to raise capital.”
“R&D finance is in line with or cheaper than other available finance options, but with a simpler, more streamlined application process”.
Radium Advances give businesses complete visibility of their loan cost from the outset and are cash flow friendly too. They’re structured so the company’s R&D refund entirely covers the advance, any interest accrued and the establishment fee. And there are no repayments whatsoever until the full ATO R&D refund arrives.
Myth 4: R&D finance is secured against your business assets
Some businesses labour under the misconception that Radium Advances are secured against company assets. And this fallacy can stand in the way of them accessing much-needed funds for R&D. Radium Advances are actually secured against a business’s expected R&D refund*. The upsides of this approach are that businesses can avoid dilutionary equity and more readily access additional capital from other sources.
Myth 5: Your R&D tax refund will be zero once you’ve paid off your advance
Many businesses fear that paying for R&D financing will burn through their entire R&D tax refund. Rest assured this isn’t the case with Radium Advances. With a Radium Advance, the maximum loan-to-value ratio is 80% of the R&D tax refund a business expects to receive. That means a company’s R&D refund more than covers all the loan costs. And as Maitreya Speering explains, “There is generally a substantial amount of R&D tax refund leftover for the business at the end of the process.”
Myth 6: You can only get one R&D advance each financial year
You may have heard about businesses using R&D advances as one-time annual injections of capital for a specific research goal. But there’s no rule limiting companies to one advance a year. Indeed, having multiple refunds each year sets off a virtuous circle for your company’s R&D. The more frequently you bring forward your R&D refund with an advance, the more your R&D budget benefits because reinvesting the capital in R&D triggers additional refunds for your business. By choosing quarterly advances, you can either spend up to 50% more on R&D using the same expenditure, or reduce your capital outlay by up to 33%. Watch our video to learn more about Quarterly advances.
Myth 7: R&D financing is for big business only
Many start-ups and small businesses with R&D think that the RDTI is for big fish and ASX-listed companies only. While it’s true larger and more established businesses can and do apply, the RDTI is angled towards helping nascent and smaller firms with R&D. This is especially evident when you consider the cash refund element of the incentive. To qualify businesses must have an annual aggregated turnover of under $20 million and can be investing as little as $20,000 into R&D a year.
Myth 8: Your R&D needs to be successful to qualify for R&D finance
This myth is probably the most wildly inaccurate of all the misinformation we hear about the R&D financing. Your research doesn’t need to be successful to apply for the RDTI and the same holds for businesses applying for a Radium Advance. We understand it’s a case of nothing ventured, nothing gained when it comes to R&D. And that means businesses don’t always get the research outcomes they were hoping for. In our book, an unsuccessful project is never a bar to businesses getting R&D capital.
Myth 9: You must apply for R&D financing by 30 June of the financial year when the R&D was conducted
At first glance, this untruth may seem plausible until you consider the nuts and bolts of how the RDTI works. Under the RDTI’s lodgement rules, businesses have up to 10 months following the end of their income year to register their eligible research with the Department of Industry, Science, Energy & Resources. Once businesses lodge their company tax return with the ATO, they will then receive their R&D tax refund. That means as long as you’re eligible for the RDTI and have registered your research, your business can apply for a Radium Advance, providing you haven’t received your R&D refund yet. So the financial year in which the R&D was conducted, and the 30 June financial year end-date aren’t the deciding factors when applying for R&D finance.
Smart, strategic capital for your business
With these common canards about R&D financing finally laid to rest, are you ready to find out more? Schedule a call with one of our helpful R&D finance experts today to explore how Radium Advances could help your business and your R&D.
* Additional terms for Radium Advances: Advances < $100k: Signed director guarantee | Advances $100k – $1million: First ranking charge over R&D refund only. Advances >$1 million: Featherweight Security Agreement or General Security Agreement