Get an advance against your SRED Tax Credit

Thanks to an innovative new use of EDC’s Export Guarantee Program, exporters now have the opportunity to receive an advance against their Scientific Research and Experimental Development (SRED) tax credits. Experts say that means exporters will be able to invest more money in critical research and development without sacrificing cash flow, particularly at a time when credit is increasingly hard to obtain.

In the Winter 2009 ExportWise newsletter from EDC, Bruce Gillespie outlines how the Export Guarantee Program can be used to turn a SRED tax credit into cash. Gillespie notes that Ottawa’s AFORE Solutions was the first company to pilot this new application of EDC’s Export Guarantee Program. AFORE provides network equipment vendors around the world with custom development solutions, whether it’s software or hardware or a combination of the two. Gillespie sat down with AFORE CEO and President Alex Berlin to learn more about the creative financing option.

 

When the company was founded in 2003, it had 10 employees. Today, it has more than 60 full-time staff, and Berlin says AFORE Solutions has seen steady growth on a year-over-year basis. He says R&D plays a critical role in the company’s ongoing success, and being able to obtain an advance against its SRED tax credits thanks to a guarantee from EDC has been a big help. “ Canada is not a low-cost geography. So, for us to compete, we have to be able to leverage the R&D tax credit programs the government provides and use them to their full extent.”

Berlin says the opportunity came about in discussions with his bank, RBC Technology Banking Group, when looking at ways of creating additional working capital facilities. After speaking with EDC, AFORE Solutions engaged an external consultant to lead them through the SRED application process in 2004. Berlin says coming up with documentation for the program’s financial review was not a major challenge, since they were already being created as part of the company’s annual external audit.

Preparing the technical review of the company’s R&D work was more involved, so AFORE Solutions worked with a consultant to prepare it to ensure the company stood the best chance of realizing the maximum level of SRED tax credits. Berlin says hiring a consultant to take the company through the process was invaluable experience, and after the first couple of years, though, Berlin says he has moved most of that work in-house.

“We’ve been leveraging our internal resources for the past three years because we know our technology best. It probably takes about three or four weeks of effort, but if you can get 25 or 30 cents return on every R&D dollar you put into the applica­tion work, it’s a good investment to make.”

Berlin says that although the SRED application process can seem daunting at first, it’s worth it in the end. “You do need to put in some effort, but the return fully justifies this effort. And once you’ve done it once or twice, it becomes more routine; every year, we spend less effort in preparing the application because we have established a process and have the in-house expertise to process the majority of the documentation.”

The program has helped AFORE Solutions maintain a steady cash flow while expanding its offerings, such as new modular software that allows network equipment vendors to accelerate their time to market and cut costs by using AFORE Solutions’ components to build custom systems. “I’ve recommended this program to many local companies because it’s a great tool that allows companies that have to invest in R&D to stay competitive,” says Berlin.

Hat tip to Riz Kheraj of NRC-IRAP for pointing out the program.