AQT and Finalta Capital offer ICT firms cash payments upfront for R&D tax credits

Two $10-million funds launched

Quebec research-intensive information and communications technology (ICT) companies have access to two new funds that will provide them with refundable R&D tax credits far sooner than previously possible and at rates comparable to traditional financing sources. The new financing mechanisms are aimed at growing firms seeking to enhance their competitiveness and productivity.

Finalta Capital, Laval QC and L'Association québécoise des technologies (AQT) are partnering to launch two $10-million funds in Montreal and Quebec City. They will offer to pre-fund companies with between 75% and 85% of their eligible, refundable R&D expenditures, paying in installments at the beginning of each quarter. Requests for assistance are processed within 15 days, compared to several months for traditional lending institutions.

The funds follow Finalta's successful $15-million Aero Montreal fund targeting the region's aerospace sector. The Laval QC-based firm — a specialty lender that finances refundable federal and provincial tax credits — is also in negotiations with a large national association for another new fund which will launch in November.

Changing the mindset

"With the globalization of the economy, companies must remain competitive even in local markets. They need to innovate and improve their productivity," says Maxime-Jean Gérin, Finalta's founder, president and CEO. "The key factor is liquidity and pre-funding (of R&D tax credits) alleviates that constraint. It changes the mindset of clients so they can complete R&D and product development faster. We're accelerating the financial health of the companies we're investing in."

In addition to refundable claims under the federal science research & experimental development (SR&ED) tax credit program, the new funds also apply to Quebec refundable tax credits for e-commerce and multimedia titles.

The first AQT-affiliated fund was launched last year and is being recapitalized with an additional $10 million, while the fund targetting greater Quebec City and the eastern Quebec regions prompted the opening of an AQT satellite office in the provincial capital.

The AQT Tax Credit Financing Funds, offer a powerful benefit for the association's 500+ members at interest rates of between 7% and 10%, depending on the level of risk. The funds typically pay 75% of SR&ED claims and 85% on Quebec R&D tax credits which are not considered as risky.

"We represent small- and medium-sized businesses (SMBs) mostly in the software sector but also micro electronics. Traditional financing is not aligned with the specific needs of SMBs. They can't properly assess the risk," says Nicole Martel, AQT's president and CEO. "It's $20 million exclusively to AQT members, like group rates for insurance. Now we can help to finance claims to come as companies invest in R&D. It shortens delays by up to two years."

Martel says one of the most attractive aspects of the AQT-Finalta funds is the potential for achieving liquidity without equity loss — a dilemma that has often forced growing firms to surrender a portion of ownership to venture capitalists and other equity investors before they achieve maximum valuation.

"The other options are banks or equity which are not great options for our companies," she says. "It gives them another door to knock on and allows them to grow and develop more quickly before meeting with VCs (venture capital firms)."

Interest spreading beyond Quebec

Prior to the launch of its new national fund next month, Finalta has secured several Ontario based clients in sectors as diverse as solar energy and industrial automation to optics and animal vaccines. Its initial success in Canada's biggest R&D-performing jurisdiction prompted a major expansion of its activities which is being noticed by other lenders and industry associations.

"We'll go wherever there is R&D. With our newest fund, we're now making a forceful effort to expand into Ontario," says Gérin. "We occupy a special position in the marketplace but the credits need to be refundable and sizeable."

AQT has also been fielding inquiries from outside of Canada and has met with several national organizations where their Finalta funds — a first for industry associations — have generated interest from organizations. These include the Information Technology Association of Canada (ITAC) and the British Columbia Technology Industry Association (BCTIA). All have a similar objective of helping small established firms accelerate R&D and growth while finding international markets for their innovations.

"Talent and working capital are the top priorities of our companies and access to international markets is their main objective," says Martel. "We're very pleased with the (Finalta) model and other provinces may follow. It also encourages traditional financing institutions to be more proactive."

How it works

Possibly the greatest difference between the Finalta model and those of traditional financing institutions is the speed with which firms can receive cash for their R&D outlays. Finalta prefunds the expenditures and pays out on a quarterly basis in anticipation of the money that companies plan to spend on R&D.

"It's a huge liquidity boost that reduces the pressure coming from company R&D programs that can take money away from staffing and other expenses." says Gérin. "We pay on the first day of every quarter so that's all paid out at the beginning of the fourth quarter By concentrating the disbursement, annual loans overlap."

Gérin says the Finalta model allows it to provide 50% more cash at any one time than any other financial institutions at a competitive cost to companies. Combined with superior turnaround times for applying companies, Gérin says he's not surprised the model is gaining attention elsewhere.

"We have the fastest close in the marketplace and we do all this at the same cost," he says.

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