Demystifying the R&D Tax Credit Loan and Grant Advance Loan market with Sprk

Overview of the R&D Tax Credit Loan and Grant Advance Loan market

Running the leading provider of R&D Tax Credit and Grant Advance loans in the UK I wanted to use this article to provide my personal thoughts on the structure of the lending market in the UK. It's key that businesses have access to fast, affordable and transparent finance so I hope you enjoy the read.

Using an R&D Tax Credit Advance or a Grant Advance is one of the best forms of non-dilutive finance for high growth companies.?That’s why we built Sprk, we focus purely on lending to companies engaged in innovation.

The ability to finance your R&D as you incur the spend through the year or pre-finance your quarterly grant expenditure is a key source of finance that more and more growth companies are becoming aware of.

Companies can wait up to 18 months from the moment they start incurring R&D expenditure to the point where they receive a tax credit.?This can put a large cash strain on businesses, which has been exacerbated by the recent pay out delays from HMRC.?

Many companies in this space are pre-revenue and also loss making.?This makes access to traditional bank debt difficult, if not impossible.?Founders are typically left with the routes of issuing equity or using convertible loan notes to finance their business.?Albeit slightly different, both incur dilution.?This is the issue R&D loans and Grant Advances look to solve.

Advanced funding can help extend the cash runway of a business, facilitate them raising less equity and hence not diluting founder equity stakes and indeed help anchor or bridge financing rounds.

In the grant space companies need to incur five months of the entire project costs before they typically get their grant award payment.?Raising capital at the start of a project to fund it versus at a potentially higher valuation once the innovation has been completed should be at the forefront of people’s minds.?Sprk’s Grant Advance solution can reduce the capital requirements for an innovation project by over 50%.

But are you paying too much to finance your R&D or Grant expenditure?

Probably… It’s typical for finance providers in the R&D and Grant space to charge an upfront fee, usually around 2.5% to 4.0%.?To be clear from the start, this is not a model that Sprk engages in.

With many companies accessing R&D or Grant funding for around ￡150,000+ these upfront fees start to mount up very quickly.

Non-dilutive finance should mean exactly that. A solution that not only supports a company in not having to raise expensive equity, but also not diluting the amount they borrow through high fee structures.

Let’s look at a quick indicative example of a typical R&D borrower and compare this:

Upfront percentage fees are typically uncapped, so as you look to finance more of your R&D or Grant, the more expensive it becomes.

For example, on a ￡1m R&D advance, Sprk still only charges an establishment fee of ￡999.?This is 1% of the total cost of the borrowing on a 6-month advance, or to put it another way 0.001% of the amount being advanced.

For competitors charging 3% upfront fees, this charge rises to ￡30,000, a whopping 26% of the total cost of borrowing.

Let’s also not forget that there are some lenders in the space that also then charge for legal fees, adding an additional cost burden on borrowers. Again, not a practice that Sprk engages in.

We’ve based this analysis off competitors charging 1.4% per month.?We’ve seen this as low as 1.25% and as high as 2.5% per month.?Even at lower levels of interest the upfront fees swamp any interest savings on a short duration loan, always look at the all-in cost of finance.

Some lenders have increased their upfront fees as the market dynamics have changed.?Fundsquire is no longer lending, in fact Sprk took over the servicing of their portfolios.?Archover have closed their peer-to-peer lending business so no longer lending in the R&D space.?Other lenders have been put under pressure from the rises in interest rates affecting their financing costs and in some cases being capital constrained.

For some lenders this has meant capping the maximum size of loan they will do or only lending after the year end of the borrower.?Sprk continues to finance R&D at any time, many of our clients integrate us into their cashflow planning and use a Sprk Advance on a quarterly basis through the year, we’ve never capped our loan size (or put a minimum on it for that matter). ￡75k+ minimum lend values are common in the R&D lending space, as the upfront fees become attractive for these lenders who charge an upfront % at that rate!

There’s also the tactic that some lenders take of giving a ‘discount’ on the upfront fee percentage.?This has the effect of making the borrower ‘feel’ as though they’re getting a deal, when in fact their all-in finance cost is still high.

We’ve also seen some lenders look to take advantage of the delays processing claims at HMRC.?Keep your eye out for nasty step-ups to ‘default’ rates if your term goes beyond an agreed duration where HMRC delays outside of your control have resulted in delays.?We’ve seen rates as high as 2.5% per month in some contracts for a delay that is out of the company’s control.?Sprk has never charged ‘default’ interest to a client.

So why can Sprk keep its costs for borrowers so low?

Sprk works with a network of Sprk Approved Advisors (“SAAs”) rather than dealing on a whole of market basis with all R&D Advisors or with brokers who introduce loans and charge a fee for doing so.?That means we don’t use our establishment fee to ‘buy’ business, it is typical for many lenders to pay commissions to receive leads.

Sometimes as much as 50% of the upfront fee you’re paying on an R&D Advance is being paid back to the R&D Advisor or broker that’s recommending the lender.?On a ￡200,000 advance that’s up to ￡4,000 of commission payments to the R&D Advisor.

Our SAAs instead benefit from a virtuous circle, with businesses recommended to Sprk for financing and Sprk in turn introducing borrowers to our SAAs for quality advice. Sprk will only lend to a borrower if they are using one of the Sprk Approved Advisors or willing to have their claim reviewed by one of our SAAs.

We create an ecosystem where the winners are R&D companies benefitting from a lower cost of finance and a superior service on their R&D and Grant advice, and the advisors getting access to high growth innovative companies through referrals.?Keeping the client at the centre of everything that we do is key to our success.

We’ve not been immune to the market dynamics though as we built Sprk and on a limited number of occasions we have paid commissions.?We’ve done this however on <10% of our loans, on the other 90%+ we have never paid a fee for the referral; the virtuous circle works.?

We would prefer to differentiate ourselves on client service and our lower cost of finance, creating long-term relationships with our borrowers and SAAs.?This way we can continue to provide a market leading all in cost of finance to SMEs looking to finance their R&D or Innovation Grant. Importantly, even when it has come to these payments, we aligned ourselves with the businesses we lend to.?

Sprk only gets paid when the company receives its tax credit or grant payment, that includes all of our interest and principal on the advance.?The only commission payments we have made have come out of our net income and we’ve never inflated our interest rates or introduced a % upfront fee to accommodate these payments.?The cost to every borrower has always remained at the same low rates.

Investing in our technology platform from day one has meant that we have been able to streamline the application and approval process, making R&D and Grant finance now simple, quick and transparent through Sprk.

Dom Peasley, CEO Sprk Capital

?www.sprkcapital.co.uk

?*Examples included represent indicative terms and the actual fees and interest may depend on the loan term, size and provider specific policies in place at the time.?Sprk’s current lending rates at the time of writing are 1.33% per month with a ￡999+vat fee that steps down each time you borrow by ￡100 to a floor of ￡499+vat.?We typically lend between 70-80% of your R&D payable credit or expected Innovation Grant quarterly expenditure.