A company under $20 million that is spending on R&D now usually waits until after its tax return is lodged to see the refundable offset, which can be a year or more after the money went out. R&D finance lets it borrow against that refund in the meantime. This article is for founders and finance leads weighing it up, and covers how it works, what it costs and when it is worth it.
How it works
A specialist lender advances part of the refund you expect, based on R&D spending already incurred, often during the year rather than after it. When the refund arrives it repays the loan, interest and fees, and the rest comes to you. Some lenders advance against a full year’s expected claim after year end, others in instalments as the spending happens.
It is only available against the refundable offset, so it suits companies with aggregated turnover under $20 million. A larger company’s non-refundable offset reduces tax rather than producing cash, so there is nothing to lend against.
What it costs
R&D finance is priced well above an ordinary business loan, because the security is a refund that has not been assessed yet. Compare offers on the total cost: the interest rate, the establishment and any other fees, and how long the loan is likely to run before the refund arrives. A loan that runs longer than expected costs more than the headline rate suggests.
The risks
- The refund may be smaller than expected. If the claim is reduced, or reviewed, the loan still has to be repaid. Borrow against a conservative claim, not the most optimistic one.
- The refund may be late. A delayed tax return or an ATO query pushes the repayment out and adds interest.
- The lender takes security. Read what it covers and what happens if the refund falls short.
When it makes sense
It makes sense when the cash buys something worth more than its cost: runway to reach a milestone, a hire that would otherwise wait, or avoiding a raise at a lower valuation. It makes less sense to fund ordinary running costs, or where the claim itself is uncertain. Selling shares to bridge a gap that a refund will fill a few months later is often the more expensive choice, which is why so many startups use it.
Lenders will want a forecast of the claim, the registration and the records behind it. We prepare the claim forecast and the registration, and keep them conservative so the loan matches what is likely to arrive. Try the calculator for a first estimate of your refund.
Questions we are asked
What is R&D finance?
In Prime’s experience, R&D finance is a loan from a specialist lender secured against a company’s expected refundable R&D tax offset, repaid when the ATO pays the refund.
Can a company over $20 million use R&D finance?
Generally not. Under the ATO rules a company with aggregated turnover of $20 million or more receives a non-refundable offset, which reduces tax rather than paying cash, so there is no refund to borrow against.
What happens if my R&D refund is less than the loan?
Prime’s view is that you should plan for it: the loan still has to be repaid. Borrowing against a conservative estimate of the claim keeps that risk small.
Before you borrow
A loan is only as good as the claim behind it. If you are considering R&D finance, we can prepare a conservative forecast first so you borrow against a number you can rely on. Book a time with us.
How we can helpR&D Tax Incentive advisory Eligibility, registration with AusIndustry and the claim itself, prepared with the records a review would ask to see.
