A Comprehensive Guide to R&D Financing
R&D finance remains a largely untapped form of funding across multiple business sectors.
This guide, therefore, will present to you the right context to understand the basics of R&D finance. It will also help you determine whether you are eligible to use the new form of funding to get the most out of your future R&D tax incentive payments. Business owners will further understand how R&D financing can fund innovation on a larger scale, including highlighting the advantages and disadvantages of R&D finance.
What is Research and Development Finance?
An R&D finance, also known as R&D tax incentive loan, is a newfound financial tool that uses a company’s future R&D tax incentive payments as collateral to facilitate debts. Most companies acknowledge the reliability of R&D tax incentive as a predictable source of cash.
What is the Eligibility Criteria?
The eligibility criteria vary across different governments, but the timeline has minimal variations. For a company to access the payments, in most cases, it has to:
- Spend money on R&D in the current financial year
- Wait until the end of the company’s financial year
- Ready the company accounts
- File R&D tax credit claim during the annual income tax returns
- Wait for up to 3 months for the processing of refunds, payouts, and offsets.
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Do Companies Need It? The Advantages of R&D Finance
Most growing companies have realised the potential lying behind Research Development Finance loans. It’s an excellent source of liquidity, especially for business entities that are between funding rounds or pre-revenue, and where other forms of funding are unavailable or incredibly expensive.
Benefiting from the Virtuous Cycle
For most companies that are experiencing tremendous growth rates, the chances are that you will channel more resources towards investing in tech. This form of finance allows you to redirect some of the funds received back into research and development. For instance, if you hire additional staff to boost the efficiency of the R&D team, the R&D tax refund will facilitate for around 33% of the staff’s annual salary.
Notably, the size of the R&D tax incentives that you have been receiving will experience annual increments throughout the years, thus allowing you to offset more fees and reinvest in R&D. This aspect enables companies to report positive net cash flow during the tax debt repayment date.
Maintaining Control of Your Company
Research Development finance tax credits allow you to maintain control of your entity, especially for pre-revenue comp. Such companies often consider selling equity as the only viable funding method but fear to lose some degree of control to external investors or shareholders. While investors can offer more value than initially bargained for, it’s intelligent to welcome investors from a strong financial position.
Helps Avoid Selling More Equity
The R&D finance option is a cheaper alternative, which, unlike selling equity that involves permanent loss of some control, helps you determine the exact amount of debt to repay while still in control. It’s always important to remember that debt is temporary and repayable while selling shares is permanent and often unrecoverable.
Allows You to Take Fast Actions and Quick Decisions
In the current, competitive business landscape, speed is everything. Whether it’s acquiring the newest technology or adjusting to dynamic market factors, acting fast increases your company’s chance of survival. By using research development funding, companies can compete ethically even to surpass the leading giants within a short period. All too often, we all agree that finance is the backbone of a growing company. Applying for R&D financing will allow your company to access funds early, make reinvestments, and redirect the capital to steer growth.
What Situation Make R&D Funding Undesirable?
While R&D financing is an excellent tool, it can be undesirable given certain occasions. First, where being in debt is an issue for existing or upcoming investors. It’s advisable to find out whether the level of debt your company is getting into will influence the decision of a potential investor that you are bringing on the table.
Secondly, where other cheaper funding alternatives are available, for example, accumulated profits, or personal savings, angel investors, and government grants.
In conclusion, R&D financing is an excellent tool that companies seeking external funding should consider. It increases the size of your final R&D tax incentive, allows you not to sell more equity, and above all, a quick and reliable financing option. You will be able to access funds early, equip yourself with the leading technology, and also gain a substantial competitive edge in the market.
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