How to finance innovation in your business
Read time: 5 minutes
Innovation requires financing. Depending on your needs and the scale of your project, this financing can come in various forms, including tax credits, grants, business loans and equity investments.
Here are the top sources of innovation financing you should look into as an entrepreneur.
Federal government tax credits
While applying for an R&D tax credit can require a fair amount of paperwork to demonstrate you satisfy the funding requirements, the size of the credit available to entrepreneurs means applying can really be worth your time.
For instance, the Canada Revenue Agency's Scientific Research and Experimental Development program, commonly known as SR&ED, provides tax credits of up to 35% of qualifying expenditures such as salaries, capital costs, consulting fees and materials. For most SMEs, these investment tax credits take the form of a cash refund.
To be eligible, your business has to show evidence of "experimental development.” For example, it might be an advance in a process on your shop floor or one generated by key people on your team.
Preparing a SR&ED application can be very time-consuming and requires knowledge of tax laws and the ability to convey information about the project in lay terms. Working with external consultants lets you invest your time in other areas of the business and ensures that day-to-day operations will not be disrupted.
Provincial and territorial R&D tax credits
Every provincial and territorial government (except Prince Edward Island, the Northwest Territories and Nunavut) has its own R&D tax credit. These programs are all administered by the Canada Revenue Agency (CRA), with the exception of those in Alberta and Quebec.
Like the federal government program, the administrative details and eligibility of spending can be complex. The CRA and relevant provincial tax agencies are your best sources of information to find which R&D tax credit you should apply for.
Grants for R&D
Depending on your business sector, you could have access to federal government grants and financial assistance for your R&D.
Grants targeting specific industries across Canada can be found at the Canada Business Network. There are also many provincial and territorial grants and financing programs. You can also find them on the Canada Business Network portal or by contacting your provincial or territorial government.
National Research Council of Canada
This government organization provides financial assistance and mentoring to businesses in Canada that want to use technology to grow.
The National Research Council administers the Industrial Research Assistance Program, which could help you meet technological challenges you face in delivering new products, processes or services.
Networks of Centres of Excellence of Canada
The Networks of Centres of Excellence of Canada aims to mobilize resources for scientific and technological breakthroughs, with a view to commercializing the results.
The Business-Led Networks of Centres of Excellence program specifically aims to resolve industry identified research problems. Costs for the research are split half-half between industrial partners on one side and research institutions and the government on the other.
Natural Sciences and Engineering Research Council of Canada (NSERC)
NSERC offers a wide range of grants for businesses to collaborate with the country’s top academic researchers.
The first step is to find a scientist or engineer with who you would like to collaborate on a research project. You can do this by contacting one of NSERC’s regional offices, contacting a post-secondary institution or even just doing an online search on the problem you want to solve. You might find a researcher close to you who is working on the problem.
Once you’ve found the right person or group to work with, you can apply for a grant with NSERC. Common grants include the Engage Grants, the Industrial Undergraduate Students Research Awards and Applied Research and Development Grants.
Engage Grants, for example, provide up to $25,000 for a short-term R&D project. In exchange, your company will be expected to participate in the research project and provide an in-kind contribution that does not have to be financial in nature, and can range from access to your company databases and equipment, to patents and licenses, software donations or use of your facilities.
Business incubators (or accelerators) commonly provide young companies with free or cheap office space, as well as administrative, logistical and technical support. Incubators generally focus on high-tech start-ups. Local economic development incubators will often accept a wider range of business types and industries.
Angel investors tend to be wealthy individuals or retired corporate executives who invest directly in small companies. They are often leaders in their own field, and their investment can go well beyond money. They often also contribute their experience and network of contacts as well as their technical and management knowledge.
Angels tend to focus on young businesses and make investments of between $25,000 and $100,000, while institutional venture capitalists usually provide financing in the $1 million or more range.
In return for risking their money, angels reserve the right to oversee the company's management practices. Angels tend to keep a low profile. To meet them, you may have to contact specialized associations.
Venture capitalists look for companies with high growth potential that offer unique products and services in promising global markets.
Venture capitalists take an equity position in the company to help it carry out a promising business plan. Be sure to look for investors who bring relevant experience and knowledge to your business and share the same objectives.
BDC Capital is a major venture capital investor in Canada. It invests in companies directly through its sector specific funds, as well as indirectly by investing in other venture capital funds. It also supports the venture capital ecosystem through a number of initiatives.
You may also be able to finance your innovation projects with a business loan.
BDC offers long-term financing to companies that want to innovate and can show that their investment will have a positive effect on their bottom line. You need a clear business plan that demonstrates the viability of your project.