Part I of ‘Non-Dilutive Financing for Entrepreneurs’ blog series
Finding customers, developing a prototype, and hiring the right talent can all be challenging. However, financing innovative ideas can be one of the largest challenges for some entrepreneurs. On regular basis, we are asked about non-dilutive financing options for small to medium-sized companies. In other words:
“How can I finance my startup without giving up equity?”
Beyond raising money from family and friends, there are a number of non-dilutive options in Western Canada. These options include grants, vouchers, tax credit programs, and even business plan or pitching competitions. Before we provide details of the programs and organizations that offer these types of support, let’s clarify the difference between a grant, voucher and a tax credit.
According to Investopedia, a grant is:
“A financial award given by the federal, provincial or local government to an eligible grantee.”
Grant recipients are not expected to repay the granting organization. It can be a lengthy application process to receive grants, but they are typically intended to support a specified project or business milestone. Many granting organizations require periodic reports on the outcome and how the money was allocated.
Since there is no obligation to repay the granting organization, grant applications can sometimes be lengthy and time consuming. The organization wants to do its proper due diligence to ensure that its money is being put to good use and will make a difference. Be aware of the granting criteria and if possible, reach out to the organization before you start the application process.
The National Research Council Industrial Research Assistance Program (NRC/IRAP) offers grants to qualified small and medium-sized enterprises in Canada to help them undertake technology innovation.
A voucher is:
“A form of government assistance that can be used to access facilities, goods, services, advice or expertise supplied by service providers (supplier).”
Basically, a voucher is used to show a transaction has taken place for services and there is an amount owed. They typically have no cash value, are non-transferable and issued in the name of the company. However, the funding is applied directly to the service provider or supplier on the voucher recipient’s behalf. Some voucher programs offer interest-free, unsecured repayable loan, where all or part of the loan is repayable depending on the terms and conditions.
The Alberta Innovation Vouchers program helps small early-stage technology and knowledge-driven businesses in Alberta get their ideas and products to market faster.
Bonus: click here to download the Ultimate Guide to Innovation Funding to learn about 20+ government programs.
A tax credit is:
“Simply put, a deduction from tax owing.”
To be eligible for certain tax credit programs, companies have to spend the money upfront. If they’re qualified for the tax credit program, then there will be either a refundable or nonrefundable tax credit applied to their amount of income tax owing.
Refundable tax credits offer a refund in cash, assuming that you’ve already paid all of your tax owing. Nonrefundable tax credits can be applied to income tax owing, however, you will not receive the additional amount in the form of cash.
The federal and provincial governments offer companies a Scientific Research & Experimental Development tax credit for their R&D efforts.
These are general definitions that are meant to help you navigate your funding opportunities. Keep in mind,every program operates independently- be sure to understand all aspects of the contribution agreement before you accept the terms.
In this new blog series, we will be covering specific grants, vouchers, and tax credits offered to Western Canadian companies. Stay tuned!