The question then becomes simply understanding the mechanics and benefits of such a financing – i.e… answers to the basic questions:

• How much can I get?
• What does it cost?
• What is involved?
• What are the benefits of financing my tax credit now versus waiting for the cheque from the federal and provincial governments in Canada?

Let’s cover off some of the answers and the basics you need to know to make an informed decision in this regard.
Business owners that either have prepared SRED claims in the past, or who are preparing them for the first time are always advised by their accountants and SRED consultants as to how much the claim will be for . The reality is that this claim is filed at the same time you file your corporate tax return. If you have highly confident that you will receive the full amount of your claim we see many clients actually booking this future cheque as an ‘ account receivable ‘ – i.e. money that is due their firm just as if it was a sale to a customer .

So when you finance that claim you are dealing with an absolute amount. But the one thing to understand is that generally advances under the SRED tend to be in the 70% range based on the total value of the claim. So for example $ 300,000 dollar claim filed by your firm has the potential to net you 210,000.00 as a working capital loan should you choose to cash flow or monetize that claim now.

Although we see some claims as much as a million dollars from clients, the reality is that most claims tend to be in the $100K – $500K range, some smaller, some larger.

On to costs. Generally the overall size and quality of your claim, coupled with the amount will dictate the costs of financing the claim. A few key points should be kept in mind, and they clearly are in the category of ‘benefits ‘. That is to say that when you undertake a SR&ED loan you receive 70% of the claim immediately – there are no payments made unlike a regular loan, and you receive the final 30% of the claim when the refund is made by CRA, or, if you choose, when they indicate in writing or via their technical audit that the claim has been approved. The financing costs are deducted out of this final 30%. So clearly the overall benefit of financing your SRED claim revolves around taking that cash and working capital and putting it to work in your business right away. Putting those funds to work might mean acquiring new equipment, reducing payables, investing in sales and marketing of your product services, etc.

A tax credit SRED financing loan is not unlike any business financing. An application with typical business background data is completed, one of the key additional pieces being of course the actual SR&ED claim you have filed, and, in some cases, proof of your success in previous years . The whole application and diligence process takes about 1-2 weeks, so if you are focused on financing your SRED claim you should undertake your SR&ED financing negotiations as soon as you have made up your mind to finance the claim.

Everyone agrees the SRED program is the government’s way of encouraging in a measurable way (their cash back to your firm!) research and development. If you have filed claims in the past, or are filing for the first time you should also investigate the benefits of financing your claims. Its non repayable money – why not put it work as early as possible to grow sales and profits and improve you overall financial picture. That’s a solid business financing strategy.

Espresso Capital Partners www.espressocapital.com is in the business of financing SR&ED claims and is happy to help any Canadian company looking to improve its working capital situation.

This article originally appeared (with some edits) in Business Financing Canada blog authored by Stan Prokop.

Original Article written by Curt Cherewayko in Business In Vancouver Jan 5-11, 2010; issue 1054

The closing of new funds and other events in the angel and venture capital investment community are promising signs that B.C.’s investment climate is improving, but don’t expect the financing flood gates to suddenly open in 2010.

While two new angel investment funds have recently formed in B.C. and a government-led super-fund has re-emerged after being stalled by the recession, investors are still being extremely selective.

In November, the provincial government’s BC Renaissance Capital Fund announced that it had selected new managers for its $90 million investment pool.

The selections were made months before the announcement, and the fund counts investments in B.C.-based Indicee Inc. and Constructive Media in July and November as the most recent of its five investment milestones.

However, the fund’s vice-president said it might still take some time before the fund managers re-expose themselves to many of the risks that come with investing in technology companies.

“We’re getting crushed this year; everyone is getting crushed this year,” said Todd Tessier, speaking of the wider venture capital investment community.

“To be fair, we’re going to need another year or two to get back to where we were in 2008.”

In 2009’s third quarter, venture capital deals in Canada totalled $191 million, down 51% from $388 million during the same period in 2008.

Domestic venture capital activity in the third quarter was the weakest recorded in 14 years.

The figures are applicable at the provincial level: B.C. has experienced sharp declines in the volume of venture capital spent and in the number of companies that receive venture capital.

However, Tessier expects B.C. to continue to “punch outside its weight class” in per-capita technology sector investment spending.

He partly attributes that to the strong angel investment community in B.C. that helps companies mature to the point where they have access to larger pools of venture capital.

Some of the most innovative manoeuvring in the investment community has recently occurred at the angel investor level in B.C.

The Western Universities Technology Innovation Fund (WUTIF), a Vancouver-based angel fund, formed a capital pool company (CPC) on the TSX Venture Exchange two years ago, but as it neared the end of the two-year window in which it could use the CPC to publicly list a company, none of its investee companies were ready to make the leap.

Instead of letting the CPC expire, WUTIF raised a pool of angel investment capital and created a publicly listed investment vehicle.

GreenAngel Energy Corp. (TSX-V: GAE) was listed last October and has invested in six early stage B.C. companies that are developing clean and renewable energy technologies, including Delaware Power Systems and Habitat Enterprises.

The public and the unaccredited investor, both of whom generally don’t have access to angel funds, can invest in GreenAngel.

“We’re going to let the man-on-the-street investor get access to new emerging technology companies in a way they couldn’t otherwise,” said Mike Volker, GreenAngel’s president and CEO.

Volker, who also manages WUTIF, said generating interest from investors remains challenging. Many of them are waiting for exit windows for their current investments.

“A guy said to me, ‘Mike, don’t bring any new deals to me, get me out of some of the ones I’m in,’” said Volker.

GreenAngel is one of the few funds that are publicly listed and make high-risk investment in startups.

It’s also unique in that recipients of GreenAngel funds must invest in the fund.

“That way, all of those companies have an interest in working together,” said Volker.

The limited partners that helped the newly formed Espresso Capital Partners close its first $2 million fund are primarily angel investors, but Espresso has also put a unique spin on the traditional angel investment model.

“The venture capital industry has significant issues right now, and that has left an enormous hole in the tech sector,” said Gary Yurkovich, a general partner at Espresso.

“There’s a vacuum, so there’s an opportunity now for innovative financial solutions for good companies.”

Vancouver-based Espresso lends capital to startup companies using an investee’s scientific research and experimental development (SR&ED) tax credit refund as collateral.

While it can take companies months to receive their SR&ED refund after applying, it’s largely a guaranteed cheque for technology developers that have their finances and paperwork in order.

After performing the proper due diligence on a company, Espresso consequently treats the SR&ED credit as a receivable and allows companies to borrow against it.

While Espresso only recently closed its first fund, it has provided roughly $1.8 million in syndicated loans to about 15 companies – primarily B.C.-based – since February 2009. •

cgc@biv.com

This article from Business in Vancouver Jan 5-11, 2010; issue 1054

R&D is subsidized in Canada through the SR&ED program.   More info is available here http://www.cra-arc.gc.ca/sred.  If you undertake R&D, chances are good that you qualify for the SR&ED program.

The basic process is simple: Declare a salary, make a SR&ED claim, file your personal tax, and you will be ahead of where you would have been if you declared no salary.  Let’s use an example of an inventor who spends a year developing a new solution.  His fair market salary is $70,000 and he lives in Ontario in 2009.

• Assumed salary applicable to R&D: 100%
• Fair market salary declared on T4: $70,000
• Potential SR&ED claim: $47,950
• Personal tax payable: $15,820

If you did not draw a salary, the company pays you $0, you owe $0 in tax and you cannot make a SR&ED claim.  If your company issues a T4 for $70,000, the company will have a liability of $70,000 in salary payable to you, be eligible to receive up to $47,950 in SR&ED funding and you have a personal tax liability of $15,820.  The net result is that you and your company will be ahead by $32,130 in cash.  If you SR&ED claim is successful, you can now pay yourself $32,130 and the company would have a salary payable liability of $37,870.  Assuming the company is making a loss after the SR&ED is taken into account, there is no tax liability for the company.

So remember, even if you don’t have money to pay salaries, in most cases making a SR&ED claim will put you ahead of the game.

The fund will be used to finance growing, high technology, research and development focused companies using the Scientific Research and Experimental Development (SR&ED) application as collateral.  Greg Smith, founding partner explains: “Many innovative companies are looking for bridge financing to get them to the next level.  They may be on the verge of closing a major equity financing, rolling out new product or have a temporary need for cash to deliver on a customer order.  In all these cases Espresso Capital, can play a significant role in providing financial assistance to help them through their working capital issues and leverage their future enterprise value higher.”

Todd Carter, CFO of Wolf Medical Systems, one of Espresso Capital’s early clients had this to say about the firm and it offerings, “The partners at Espresso Capital understood our software business model, quickly put together a financing for Wolf that allowed us to bridge operations until we closed our equity financing – at a time when the financial markets were in an upheaval.  Today, we have all the pieces in place to execute on the market opportunity for Wolf Medical’s Electronic Medical Record solution.”

Gary Yurkovich, also a founding partner, provides some background on the company and market.  “As the economy took a major downturn, we looked to see how we can help smaller companies meet their growth objectives.  It was clear that the capital markets were drying up, banks had become more risk averse, and companies with great solutions and a bright future were struggling to find sources of capital.  Espresso Capital provides that much needed source of financing to technology or research organizations that have a solid track record of preparing and filing SR&ED claims.  We believe our SRED fund provides compelling value and is important part of the technology financing continuum.”

The SRED I fund is expected to provide bridge capital to dozens of companies each year.  The SRED I fund is available to all companies planning to receive SR&ED claims throughout Canada.

About Espresso Capital Partners

Espresso Capital Partners is the premier privately held specialty finance firm focused on financing SR&ED claims. Founded in 2009, Espresso Capital Partners services all areas of Canada with offices in Vancouver and Toronto with representation in Calgary.

Contact

Greg Smith
778-895-4881
greg@espressocapital.com

Gary Yurkovich
(604) 889-8454
gary@espressocapital.com

Fast forward to today and the coffee industry in Vancouver is integral part of our everyday life. Every tech hub has its legendary meeting spots where business plans were crafted and financings negotiated.  Silicon Valley has Il Forniao & Bucks, Vancouver has its abundant coffee shops – Artigiano’s and Mink spring to mind.

As all battle-scarred entrepreneurs know raising money is never easy.  It is cold comfort to know that when investment managers go to “the market” to raise funds, cap-in-hand, they face the same rejection moment… when the people with the bags of money to invest call their business plan ugly.

So, it is with great satisfaction, my partners and I are able to announce “Hey – we closed our fund!!”.  It is the first, and if we do our jobs right, not the last. It is “only” $2.0 M dollars, but in our model $2.0 M can be leveraged by a lot of companies on their growth path. We provide short term working capital to Canadian companies who qualify for SR&ED program. It’s timely and based on company responses so far, much needed in the marketplace.

We hope this is just the start – the start of a financial firm that is different and innovative, like our clients.

Thanks to our limited partners for entrusting us with their funds, and everyone else who has helped and encouraged us along the way.

It has been a long time (almost 9 years) since I sold my business and I was assimilated into the acquiring company.  As I was now part of a larger organization, marketing was no longer in my job description.  I was able to throw the marketing tactics over the wall to a group of colleagues to execute.  It was their job to craft the message, positioning, value proposition and create actions to drive the business forward.  I didn’t always agree with some of the outcomes, but as an ex-Founder, it was one less task I had to worry about. Nice.

When I volunteered(?) to my partners to take on the job of putting together a website for Espresso Capital – I initially thought “how hard could that be?”.  Hire a graphics designer, write some copy and presto – instant visibility.  Well a few months later, it is up and running and I am reminded of my start-up days.

I had forgotten how much work was required and thought cycles has to go into getting your positioning right, aligning the messaging, keeping it simple and making sure the marketplace “gets what you do”.  Many times as a prospective investor I have prodded and poked companies on this very point – what is it exactly that you do and what is your value proposition?

For my partners and I at Espresso Capital, we believe our SRED-back working capital loans are an important part of the technology financing continuum.   Growing companies are always constrained by cash, and through our offering, we bring options and value to the high tech ecosystem.

What do you think, does the website hit the mark?

Let us know as we are always open for feedback…