Overcoming the Bottlenecks in Financing Innovative Start-Ups

March 4th, 2016

key-951783_960_720Undeniably, we live in the so called “digital age”. Innovation has formed an important role in our modern society and has been touted as the blueprint to success by the Turnbull government. It plays a key role for medical and environmental improvements, and by its commercialisation, the digital industry also has potential material economic impact. Thus, it is crucial to fully understand innovation’s drivers and processes – from both a socio-economic and a business perspective. Within this scope, adequacy financing the major players of this industry, the predominantly young and highly-innovative companies, is a major factor of success.

Furthermore, empirical evidence shows that start-up firms play a vital role for the advancement of the digital industry, mainly due to their function of serving as a technology-transfer mechanism to bring research from the academia to the marketplace. In fact, according to PWC, the Australian tech start-up sector has the potential to contribute $109 billion, or 4% of GDP, to the Australian economy and 540,000 jobs by 2033. Irrefutably, it is widely recognized that high-tech start-ups are a major source of new innovations and the very nature of innovation is that it involves, research, experimentation and development. Thus, leveraging the outputs of high- tech research and development (R&D) is key in the creation of a successful Australian start-up ecosystem.

However, access to finance remains a key bottleneck for SMEs that are undertaking research and development. As a result, majority of the governments around the world incentivise start-ups to undertake R&D activities through tax breaks.  This is because it is recognised that R&D often coincides with innovation and productivity, which essentially drives nations forward by solving problems and creating opportunities.In Australia, the government provides a lucrative incentive to companies undertaking R&D work in the form of the R&D Tax Incentive.

To elaborate, the incentive helps by offsetting some of the costs of performing R&D. For instance, if your business turns over less than $20 million in revenue and you are in a tax loss position, then up to 43.5% of your eligible R&D expenditure with be refunded by the Government in the form of annual cash rebates. This means real working capital for a project and cash flow for a business, so the focus can be on developing a product without the pressure of needing funding.

As noted above, the refundable component applies to businesses making a loss, which many tech start-ups originally will be. Most importantly, these companies receive it back as cash – which is exactly what a start-up needs to help get its business off the ground. Nonetheless, the benefit also comes in the form of tax credits for businesses making a profit.

Overall, the R&D tax incentive offers a means for innovative start-ups to overcome financing bottlenecks. As it currently stands, Australia has a competitive R&D tax incentive program on a global scale, and has one of the best refundable R&D tax offsets and cash back schemes internationally. Broad access to R&D funding, which the current programme offers, will ultimately increase the competitiveness and success rate of start-ups. On the whole, the R&D tax incentive is designed to encourage investment by Australian businesses in R&D, and it works. Knowing that companies will receive this money back at the end of the year allows them to invest more in R&D than they would otherwise. Without continued R&D, firms risk losing both reputation and competitive positioning in the market, and could gradually decline through failure to invest in new products, technologies and processes.

Please contact one of Swanson Reed’s Specialist R&D Tax Advisors if you are interested in learning more about the R&D incentive and what this can mean for your business.