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R&D News & Updates

Are you a business looking to access finance for your R&D activities?

Getting funding for your R&D activity can often be the main challenge facing Australian businesses seeking to innovate. The hard work that goes into a great business idea or concept, finding the right people and bringing the new product or service to market, could all be undone if funding cannot be accessed.

For companies that are scaling or bootstrapping, selling equity is often one of the only ways to access new revenue streams. Growing usually requires the equity holders to sell more, with the major challenge facing companies seeking funding is that banks will only take an interest once revenue milestones are met. This often means taking on additional debt.

There is another option available to Australian businesses investing in R&D activities. Research and development (R&D) financing based on the R&D Tax Incentive is provided by many firms across the country, that recognise the capability gap in the market.

Companies that are scaling are often aware that there is access to additional funding streams for their businesses. However, for this exercise let’s do a quick recap around the ins and outs of the R&D Tax Incentive and how it works within the Australian context.

 

What exactly is the R&D Tax Incentive?

The R&D Tax Incentive scheme is run by AusIndustry and is an Australian tax incentive created for companies investing in innovation. This initiative of the Australian Government encourages companies to engage in research and development that benefits the community by providing a tax offset for eligible R&D activities.

The R&D Tax Incentive allows eligible applicants to claim back up to 43.5% of eligible expenditure that’s been spent on creating or improving a new product or service. Eligible expenditure that qualifies as R&D by their definition can offset their costs and reduce their overall tax liability because of the scheme. For companies turning over less than $20 million, the incentive is refundable – meaning that businesses with none or low tax liability can receive a cash tax offset. The Australian scheme is one of the largest in the world, although countries like New Zealand, Norway, the UK, and Canada all offer a variation on the program.

The Department of Industry, Innovation, and Science is the federal government arm that you need to apply to in Australia to access the R&D Tax Incentive. Ensuring high-quality record-keeping is maintained throughout the process is critical. If everything is in order the process can be relatively fast, with registration taking between two to 10 days, with the tax refund coming through in two weeks after that.

For companies that are scaling or at an enterprise level, the R&D Tax Incentive often acts as a crucial revenue stream during resource-intensive periods of the business life-cycle. That is where R&D financing may be able to assist in boosting cash flow at critical times.

 

R&D Financing – how does it work and can you apply for it?

Similar in some, but not all respects to asset finance or other debt instruments using guarantees, R&D finance uses your R&D Tax incentive benefit as collateral. The major point of difference is that R&D financing relies on a future receivable from the Australian government.

Scale-ups and enterprises often invest hundreds of thousands if not millions of dollars into new technology, products, services, and innovation. If these activities are eligible to receive the R&D Tax Incentive, that means they can apply for R&D financing.

This is where a platform like Synnch, alongside experienced and knowledgeable R&D advisors, comes into play. They are needed to provide lenders with the information that they need from the company. This includes detailed records on the innovation activities taking place, an overview of the business’s plans, cash flow forecasts, management accounts – all to provide a potential lender a detailed understanding of the nature of the innovation taking place and the companies overall financial posture.

 

Is taking out R&D Finance a good idea or a bad one?

R&D Finance provides an option to companies that require assistance in bridge financing between rounds, aids them in avoiding selling off the equity, and can provide a debt funding option if they cannot access other types of debt. There are other benefits in that if a business is investing significantly in R&D, and chooses to access R&D finance at an early stage in the year, it can put these funds into more R&D – having the end result of aggregating R&D expenses to create a larger tax incentive benefit.

This does not change the fact that R&D financing is still a form of secured debt, and at the end of the day, debt is debt. This may impact additional investment from angel investors, venture capitalists, or other potential partners as this debt can come up as an issue requiring additional negotiations around secured debt with security holders over a company. Maybe not a deal-breaker but certainly something that could stall the investment process. One final point, R&D lenders work with medium-sized and larger expected offsets with $100,000 the usual starting point.

At the end of the day, it is useful to know what assistance is available for companies investing in innovation. R&D financing could be a useful tool to aid you at a critical time in the business lifecycle and like other options can be assessed for its suitability to provide some alternative funding. Ensuring the provision of quality information, collected frequently can assist with the funding process which is where Synnch comes into play as it can make the eligibility process an easier one for funders and applicants alike.

If you have any questions regarding the R&D Tax Incentive or about Synnch please feel free to contact us at hello@synnch.com.au



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