First published by SmartCompany on 14 May 2020 as The smart way to innovate, without breaking the bank: Australian startup founders and CFOs bust the myths of R&D financing
Research and development is a critical way for a business to grow and gain an edge over the competition. But funding R&D is expensive — even with the government’s R&D tax incentive.
Although the incentive can return up to 43.5% of spending on R&D activities, businesses have to wait until after the end of the financial year to receive a rebate.
Enter R&D financing.
R&D financing is a loan that enables businesses to access their tax refund early and progress their R&D activities.
However, there are misconceptions about R&D financing. Some think it’s expensive, while others believe it’s secured against business assets.
SmartCompany spoke to accountants and industry experts to find out the truth.
Myth 1: R&D needs to be your company’s primary or only activity
“Your eligible R&D activities need to be performed within Australia”, says Julian Hocking, CFO at Quantify Technology — an Australia-based smart home tech solution.
“But, your business can have other activities here or overseas.
“We still invest significant resources into furthering product development. As such, we’re able to participate in the R&D grant provided by the government.”
R&D partner at accounting firm Carbon Group Maitreya Speering agrees.
“Many eligible businesses are using R&D to simply improve existing products and services, rather than blue-sky research”, Speering says.
Myth 2: R&D finance providers are lenders of last resort
“It’s my first port of call in terms of cash management”, says Hocking.
“Borrowing on eligible R&D expenditure during the year allows me to reinvest those funds back into further R&D activities.
“Bringing forward and reinvesting the refund each quarter has the added strategic benefit of triggering extra rebates.”
Hocking notes that there are few alternatives which allow a return on debt on an interest-bearing loan as a borrower.
Lauren Barber, Director and Founder of medical device company NeedleCalm Pty Ltd, agrees R&D finance can play a strategic role in securing much-needed funds.
“R&D finance providers can be used strategically if you have a firm trajectory with your project timelines”, she says.
Myth 3: R&D finance is expensive
Carbon Group’s Maitreya Speering explains that traditional capital sources for start-ups can be expensive — or hard to access full stop.
“Many organisations have the misconception that R&D finance is an expensive way to raise capital”, Speering says.
“This simply isn’t true.
Many eligible businesses are using R&D to simply improve existing products and services, rather than blue-sky research.
“R&D finance is in line with or cheaper than other available finance options. On top of that, R&D finance has a simpler, more streamlined application process.”
Myth 4: R&D finance is secured against your business assets
Some organisations may be cautious about seeking R&D finance under the mistaken assumption that it’s secured against business assets.
This myth is another that’s debunked by Speering, who explains that R&D finance has no security over business assets.
“It uses your future, expected R&D refund as the only security for the funds”, says Speering.
“It translates to greater financial performance on both book and at bank, with the added benefit of being non-dilutionary”, adds Hocking.
Myth 5: By the time you’ve paid your principal and interest, there will be no outstanding balance left from your R&D tax refund
Some businesses worry that there won’t be anything left of their R&D tax refund after their R&D loan has been repaid.
“That’s not the case with providers such as Radium Capital”, Speering explains.
“The finance arrangement is 80% of the expected refund.
“There is generally a substantial amount of R&D tax refund leftover for the business at the end of the process.”
Interested in R&D financing and want to know how much you can borrow? Use our calculator to find out how a Radium Advance could help your business.