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Financing for innovation Add to ...

Innovation can mean different things to different businesses. It might involve commercializing a new product, research and development (R&D) or an in-house project such as improving a process. In all cases, however, innovation requires financing.

Depending on your needs and the scale of your project, several avenues are available: public funds or grants, tax credits, personal investment, financial institutions, angel investors and business incubators.

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Government funding

Formal R&D involves making an advance in science or technology. Applying for an R&D grant or a tax credit usually requires a fair amount of paperwork demonstrating how you satisfy the funding conditions and requirements. A significant portion of R&D funding is directed to the academic milieu, where businesses and universities often work together.

Canada Foundation for Innovation (CFI): The Government of Canada created this independent corporation to fund research infrastructure, particularly in the academic, health care and nonprofit sectors.

Canada Business: This portal, set up by Industry Canada, provides information on financing, human resources, product development, marketing, pricing, intellectual property and research services. Also included are diagnostic tools and articles related to innovation.

National Research Council Canada (NRC): This governmental organization provides non-repayable contributions and mentoring to small businesses in Canada that want to use technology to grow. NRC administers the Industrial Research Assistance Program (NRC-IRAP) designed to help Canadian small and medium-sized enterprises (SMEs) meet technological challenges they face in delivering new products, processes or services.

Natural Sciences and Engineering Research Council of Canada (NSERC): This federal government body invests in research in science and engineering at Canadian universities. NSERC is always seeking opportunities to work with other organizations with common goals to support research and student training.

Business incubators

Business incubators (or "accelerators") generally focus on the high-tech sector by providing support for new small businesses at various stages of development. There are also local economic development incubators, which focus on areas such as job creation, revitalization, and hosting and sharing services.

Commonly, incubators will invite young companies to share their premises, as well as their administrative, logistical and technical resources. For example, an incubator might allow you to use its laboratories to develop and test products for a reasonable price before beginning production.

The Canadian Association of Business Incubation has a comprehensive list of business incubators in Canada and links to other resources.

Angel investors

Most angels are 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 the financial; they usually also contribute through their experience and network of contacts as well as their technical and management knowledge. According to Canada Business, angels in Canada have invested in roughly twice as many companies as institutional venture capitalists have. Angels tend to focus on young businesses and to make investments of between $25,000 and $100,000, while institutional venture capitalists usually provide financing in the $1 million or more range.

In turn for risking their money, angels reserve the right to oversee the company's management practices. In concrete terms, that often involves getting a seat on the board of directors and receiving an assurance of transparency.

Angels tend to keep a low profile. To meet them, you have to contact specialized associations. The Canadian Angel Investment Network can help put you in touch with angels. Angel Investors Canada is a not-for-profit organization that promotes best practices in this field.

Venture capital

Successful R&D-based companies can also attract venture capital. Venture capitalists are always looking for companies with high growth potential that offer unique products and services in addressing promising global markets.

Venture capitalists take an equity position in the company to help it carry out a promising but high-risk business plan. They also expect a healthy return on their investment, often generated through a merger and acquisition opportunity or when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business and share the same objectives.

BDC Venture Capital invests in early-stage, technology-driven companies strategically positioned in the following sectors: biotechnology and medical devices, communication and information technology, energy, environment, electronics and materials, as well as industrial technology.

Tax credits

Many provincial and federal tax credits are available for SMEs conducting R&D or experimental development. Information on these credits is available through the Canada Business portal.

For instance, the Canada Revenue Agency's (CRA) 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 (ITCs) take the form of a cash refund. Some provinces have complementary programs.

To be eligible, your business has to show evidence of "experimental development," which could be an advance in a process on your shop floor or generated by key people on your team. Eligible companies often show that they're taking technological leaps into uncharted territory. ITCs are offered to businesses that develop or improve products and processes in industries such as manufacturing, software, custom machinery and internet access.

Consultants who have successfully coordinated other SR&ED applications can help you get access to these tax incentives. A BDC consultant, for example, can help you identify eligible projects, prepare technical project descriptions and accelerate the process with the CRA.

Preparing an 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.

Bank financing

Your innovation projects can also be financed through direct loans.

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.

We also provide subordinate financing, an excellent alternative for growing companies. This innovative and flexible financing solution combines the advantages of a term loan and equity - it does not dilute ownership and can be structured to maximize your return on investment. Subordinate financing is intended for high-growth or mature firms with minimal securities that have successfully progressed beyond the start-up phase.

If you work with BDC, you can seek related innovation advice from BDC Consulting, which conducts innovation diagnostics and helps you develop clear, results-driven strategies.



Content in this section is provided in partnership with the Business Development Bank of Canada. BDC provides entrepreneurs with financing, venture capital and consulting services. To find out more go to BDC.ca.

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