The dilutive nature of early stage equity financing (i.e., giving up ownership) makes it the most expensive way to finance growth. When a start-up does not have enough cash in the bank or cash flow to support their growth (hire more employees, fund working capital, etc.), the company is faced with a significant funding barrier that quite often results in tepid acceleration or worse, either bankruptcy or a fire sale.
When seeking various financing options, it always makes sense to start off with the cheapest form of capital until the threshold is met at which point, you would go to the next tranche of financing – for example (in the order of least to most expensive):
- Cash on hand and internally generated cash flows;
- Traditional bank debt;
- Loans from friends and family;
- Alternative debt financing (subordinated/mezzanine debt or factoring); and
- Equity financing.
At the end of the day, all types of financing are based on one of two things: cash flow or hard (tangible) assets. However, by leveraging its vast knowledge and experience in the SR&ED program, North Innovation Fund (NIF) focuses on an intangible asset – SR&ED accruals. NIF is a provider of SR&ED accrual debt financing, which is timely, flexible and more importantly non-dilutive. What differentiates NIF’s SR&ED financing from other SR&ED financiers is the fact that NIF advances funds before the SR&ED claim is filed (i.e., beginning of the fiscal year). This type of funding plays a critical role in an early stage company’s capital structure by providing the runway to a future round of equity investment or a bridge to the next level of growth.