It’s very difficult to grow a company without having some investment, especially in today’s economy. By understanding the options available to SMBs, they can not only grow but accelerate their business growth with effective financing. Because our economy has so many moving parts and is volatile in 2025, raising capital is more difficult than ever and often takes longer than it has in the past. This is a practical guide on how to navigate the economic, political, and market storms of 2025 with effective financing.
Introduction
SR&ED financing is a form of debt financing. The issue for tech startups is that it has historically been very challenging to qualify for debt financing because the company has very few assets. More specifically, tech companies often have very few tangible assets and rather develop intangible assets such as software and intellectual property. Canadian financial institutions won’t lend to startups that only have intangible assets without showing profitability over a two to three-year period. The purpose of this post is to explore alternative debt financing options for asset-light tech companies and go deep into SR&ED financing.
SR&ED Financing Solutions
There are a handful of SR&ED financing companies that cater to SMBs. We don’t have time to discuss each in detail, but look for another blog post in the future.
Bonsai Growth
Based in Vancouver and servicing Canada Bonsai is the most recent lender to offer SR&ED financing. They also finance government grants.
Easly
The largest funder of SR&ED outside of Quebec, Easly offers competitive rates and streamlined service to SMBs.
Finalta Capital
Based in Montreal, Finalta offers larger credit facilities to SMBs and large enterprises based on government receivables. They primarily fund in Quebec but have recently made a push outside of Quebec.
Investissement Québec
A government organization that offers SR&ED financing to Quebec-based companies. Its rates are competitive, but they have a number of terms the company must meet.
R&D Capital
Based in Montreal, R&D Capital primarily funds SMBs in Quebec. They have flexible terms and can help a broad range of companies.
RBCx
The only bank to offer an SR&ED product, RBCx will package SR&ED financing with its other solutions to support a wide range of companies. Their interest rates are typically lower than specialty lenders, and they have a broad range of solutions for SMBs.
Qualifying for Traditional Debt Financing
In Canada, RBC has a lion’s share of traditional bank loans to technology SMBs through their RBCx platform. Other major banks, including Scotiabank, National Bank, TD, CIBC, BMO and others, also provide tech financing but generally focus on later-stage companies.
To qualify for traditional debt financing, banks look at the company’s cash flow, balance sheet and income statement. They want to see a strong credit history with prior credit facilities, consistent and predictable revenue streams over a two to three-year period, a debt service coverage ratio (the amount of earnings in excess of the debt obligations) of 1.25 or higher, a solid business plan, and possibly a personal guarantee.
The bank’s criteria poses a few challenges for tech SMBs:
- No tangible assets → Difficult to meet collateral requirements.
- Short operating history → Harder to qualify for traditional loans.
- Irregular or inconsistent revenue → May not meet cash flow thresholds.
- High growth but no profitability → Traditional lenders prefer stable profits.
Therefore, it is unusual for a smaller technology company to qualify for bank financing. In 2025 the banks have even further tightened their credit policies, which is making it more difficult for strong companies to qualify for debt. Macroeconomic factors and general uncertainty around the Canadian economy compound the hesitancy of the banks to extend credit.
Alternative Debt Financing Options for Asset-Light Tech Companies
SR&ED financing has been a staple for many technology companies since Espresso Capital and others brought the product to market in the early 2000’s. However, there are other types of debt that tech companies may have access to. This quick review will provide some guidance on raising non-dilutive capital to fuel your growth.
Revenue-Based Financing (RBF)
- How RBF works: Repayment is based on a percentage of monthly revenue.
- Benefits: No equity dilution, flexible repayment structure.
- Ideal candidates: Companies with predictable revenue streams (e.g., SaaS businesses).
Venture Debt
- Venture debt is a type of non-dilutive financing to VC-backed startups and high-growth companies, offering capital without requiring immediate profitability or traditional collateral, typically in exchange for warrants or equity kickers.
- Typically offered by specialized lenders and some banks in Canada
- Best for companies with strong revenue growth but lacking tangible assets.
Government Loans and Grants
- There are many government loans and grants. BDC administers many of the loans while NRC IRAP and other government agencies at all levels of government have grants.
- Many government grants and loans are targeted at specialty groups, industries or geographies. Check with an expert to understand what your company may qualify for.
Equipment & Invoice Financing
- Invoice factoring: Using outstanding invoices as collateral.
- Equipment financing: Securing loans based on purchased assets like servers, or software licenses.
- Best for companies with clients on long payment terms.
Corporate Credit Cards & Lines of Credit
- Business credit cards with high limits and flexible repayment.
- Lines of credit: Short-term, revolving capital solutions.
- Many of the bank credit facilities will require a personal guarantee. Therefore, be cautious about leveraging these solutions.
Convertible Notes
- Short-term debt that converts into equity that is used by investors.
- Typically used in early-stage fundraising.
- Ideal for small companies where valuing the company is difficult or investors want more control and optionality.
How SR&ED Financing Works
SR&ED lenders look at the amount of accrued SR&ED (the SR&ED work that has been accumulated but an SR&ED claim has not been filed) and use this as collateral for a credit facility. Oftentimes, there will be quarterly disbursements based on the estimated accrued SR&ED. Some SR&ED lenders will lend based on estimated future SR&ED, which would provide more capital at an early stage.
The credit facility can be either a factoring agreement or a commercial loan. There are different legal mechanisms for providing debt capital, and it is important to understand the details of each agreement.
The SR&ED loan is typically repaid when the SR&ED claim is refunded. The SR&ED refund is most often deposited directly from the CRA to the lender’s bank account. The lender reconciles the principal amount and interest owed and returns the remainder to the borrower.
SR&ED lenders offer a loan-tovalue of the SR&ED credit of 50% to 80%. This means that if a company is accruing SR&ED of $100k per quarter, it is likely they can get a loan of $70k per quarter. The stronger the company, the higher the loan to value. However, as mentioned, because some lenders fund future SR&ED, the loan-to-value ratio can vary significantly.
Lenders have different ways of charging fees and interest. Some lenders charge a legal fee, an underwriting fee and others a disbursement fee. Oftentimes, these are non-refundable fees that are charged on or before receiving the loan. Some lenders charge interest on a monthly basis, others quarterly, and some don’t charge interest until the loan is repaid via the SR&ED refund. Delaying interest payments improves the borrower’s cash flow as there is more money to invest.
A specialty SR&ED lender does not have as high a credit bar as a bank. Lenders will look for predictable cash flows, a track record of successful SR&ED claims, an ability to securitize the SR&ED tax credit and a company and CEO with a good reputation and credit score. Most SR&ED borrowers are not profitable and may or may not be growing. This makes SR&ED financing ideal for many companies that cannot access other forms of debt and do not want to suffer equity dilution.
Pros & Cons of SR&ED Financing in 2025
Pros | Cons |
|---|---|
💰More cashFor many small businesses, cash is king – meaning that the more money available in the bank account, the better the business will perform. Cash can be used for payroll, additional advertising or any strategic initiative. Being able to more closely match cash inflows with outflow is a big benefit to SMBs. Ideally, a company would receive an SR&ED refund every month. Because this is not possible, quarterly loan disbursements are the next best alternative. | 💳More expensesLoans from specialty lenders will cost between 10% and 20% of the value of the SR&ED claim. Some of these expenses, such as legal expenses, may be upfront and others during the term or upon maturity of the loan. Regardless, there will be a cost to the debt. Fortunately, the cost of the loan is typically less than the cost of capital for technology SMBs. |
👤Retain more ownershipGiving up equity when a company has hit a bump in the road or has a low valuation can prove to be very costly. If the company is successful, even a small amount of equity dilution can cost millions of dollars. By taking on debt, there is no equity dilution, and therefore, the founders retain more ownership and control of the business. | 🔒More restrictionsMost loans are accompanied by a set of covenants. These are terms of the loan that the company agrees to maintain for the life of the loan. Some may be simple, such as maintaining an insurance policy, while others may be more challenging, such as liquidity ratios or minimum quarterly revenue growth. The challenge with covenants is that if one or more are tripped, the lender may have the right to take over your company. |
⚡Fast processObtaining an SR&ED loan can be done in as little as one week. The average is anywhere from two to four weeks. The lender will ask for an underwriting package, which is relatively straight and includes bank statements, income statements, balance sheets, incorporation documents, access to the CRA and other materials. Once everything is provided to the lender, the underwriter determines if the company qualifies for a loan, and the credit committee approves the loan. Compared to raising equity, which can take anywhere from three to twelve months, SR&ED lending is much quicker. | ⚡Little negotiationIt is rare that a borrower can negotiate the terms of a loan. The borrower may be able to negotiate the interest rate, the timing, or the amount of the disbursements, however, this is also rare. Most lenders have standard terms and conditions that cannot be altered. It may be possible to negotiate the interest rates or fees, but most lenders will offer pricing commensurate with the risk of the loan and not negotiate. |
🚀Accelerate R&DWith quarterly loan disbursements, the funds can be used to accelerate R&D or for any other priority in the company. Typically, lenders want to see the funds being used for either R&D or sales and marketing rather than repaying another lender or another activity which does not accelerate the growth of the business. | 📝Administrative effortThere is some effort associated with preparing the credit package for the lender, tracking paid or accrued interest and accounting for the SR&ED refund. It is important for the company to have clear visibility into its liabilities and covenants so that it is on the side of the loan. Tracking and reporting to lenders can take effort, but it should generally be part of the monthly or quarterly accounting exercise. |
👩💻Good for startups & scaleupsWhile any company can qualify for an SR&ED loan, typically companies that are cashflow negative or do not have a strong balance sheet utilize SR&ED financing. If a company can attract bank financing, even in addition to specialty lender financing, they will most likely pay a lower interest rate. With all there is to do in a startup and scaleup, SR&ED financing is a simple way to raise capital while continuing to focus on the business. | 📈High interestRelative to a mortgage or other debt products, an SR&ED loan from a specialty finance company has high interest rates. Even banks will charge more for SR&ED financing than they would for a mortgage. This is due to the risks associated with SR&ED lending and the volatility of technology companies. |
🛡️No personal guaranteesMost lenders will not require a personal guarantee. This allows founders to sleep better at night, knowing that if something were to go very wrong, their personal assets would not be affected. | ✅Guaranteed by assets of the companyMany founders put everything into their startup or scaleup, and if something goes wrong, the lender may be able to take over the company. Some SR&ED lenders take security only on the SR&ED claim, but most take a General Security Agreement (GSA) on all the assets of the company in the event the SR&ED refund is less than the amount owed. |
🔄Frequent access to fundingOne of the best features of an SR&ED loan is that there are typically quarterly disbursements. While it is not as convenient as a line of credit where one can withdraw or deposit funds on a daily basis, it is more flexible than equity or a fixed-term loan. Quarterly draws allow for closer matching of R&D expenses with cash received from the loan. | ⚠️Risk of too much debtTaking on too much debt can lead to insolvency. It can also be costly to service a significant amount of debt. It is important for a company to have sufficient cash flow to be able to service the debt. If the company hits a bump in the road and there is a significant debt load, debt covenants are breached, which can lead to the lender demanding repayment. Even worse, lenders can decide that the best course of action is insolvency, in which case the founders typically lose everything they have worked so hard to build. |
Conclusion
Navigating the financial landscape in 2025 is challenging, especially for asset-light tech SMBs seeking growth capital. While traditional bank loans remain difficult to access, alternative financing options—such as SR&ED financing, revenue-based financing, and venture debt—offer viable paths to securing non-dilutive capital.
Understanding the nuances of each financing method is crucial, from interest rates and loan terms to potential restrictions and benefits. SR&ED financing, in particular, can be a powerful tool for companies engaged in R&D, providing access to capital without requiring equity dilution.
If you’re considering SR&ED financing or other funding solutions, take the time to assess your eligibility, compare lenders, and seek expert guidance to make the best decision for your business. If you want personalized expert advice on SR&ED or SR&ED financing, reach out to us at contact@growwise.ai.
