How Much Does an R&D Loan Cost in Australia?

By Alex Knight, Founder and CEO, Advanced

Ask three funders what an R&D loan costs and you'll get three rates. None of those rates will tell you what you actually pay.

The rate is one line on a term sheet. Ownership, security, control and time sit in the other lines, and they are the ones that surprise founders a year later. I want you to see all five before you sign anything, so this guide puts them side by side, with numbers. In this guide, R&D finance means what most people call an R&D loan: cash advanced against your R&D Tax Incentive refund.

The five costs of any funding option

Every funding option charges you in five ways. Rate and fees are the dollars you pay. Ownership is the slice of your company you give up. Security is what the funder can reach if things go wrong. Control is what you need permission for. Time is how long the money takes to arrive and how long you pay for it.

Most comparisons stop at the first one. That works when you are choosing between two loans. It breaks down when you are choosing between a loan and an equity round, because the cost of equity never appears as a rate.

What equity costs

Equity costs you ownership, and ownership is the one cost you cannot pay off. The maths is short. Divide the amount raised by the post-money valuation and you have the slice you gave away.

Raise $500,000 at a $4 million pre-money valuation and the post-money is $4.5 million. You have sold 11.1% of your company. If that company is worth $20 million at exit, that 11.1% is worth about $2.2 million. The $500,000 cost you $2.2 million in the end, plus the months of founder time the raise took.

Some things only equity can fund, so equity still has its place. Put a dollar figure on it before you compare it to anything else.

What debt costs

Debt charges you a rate and fees, and it often charges you in other ways too. A bank loan or venture debt facility can come with security over your assets, covenants you have to keep meeting, and sometimes a personal guarantee from a director. Venture debt can also include warrants, which are a small slice of equity by another name.

All of it is in the paperwork, and none of it shows up in the headline rate. Read the security, covenant and guarantee clauses before you compare rates. If you are weighing R&D finance against venture debt in particular, our guide to R&D finance vs venture debt goes line by line.

What an R&D loan costs

R&D finance, the product most people search for as an R&D loan, advances you cash against the refund the ATO already owes you under the R&D Tax Incentive. At Advanced the price is 16.5% per annum on the amount you draw (about 1.38% a month), plus a setup fee from $950. There are no monthly repayments. You repay when the refund arrives. There is no equity, and the facility is secured against your R&D Tax Incentive receivable, with no personal guarantee.

The cost scales with one thing: how long the money is out. Here is an illustration. You draw $100,000 and your refund lands six months later. Simple per annum interest on $100,000 at 16.5% for 180 days is about $8,100. Add a setup fee at the low end of "from $950" and the total is roughly $9,100. That is about 9% of the amount drawn, for six months, with no ownership given up.

Illustration only. Your facility terms set the actual figures, and a later refund means more interest, so plan on the slow case. Our cash-flow guide shows how, and the full terms are on our R&D loans page.

When you compare R&D lenders, ask four things. Is the rate quoted per month or per year? Is the setup fee a flat amount or a percentage of what you draw? Is there a closing fee? What is the minimum loan period? Lenders quote these differently, and the headline rate rarely tells you the total.

How to compare the three with your own numbers

Start with the time horizon, because it decides everything. If you need the money for six months until a refund lands, you are comparing a six-month cost. If you need it for two years, you are comparing something very different.

Next, put each option into dollars over that horizon. For debt and R&D finance, that is rate multiplied by time, plus fees. For equity, pick a valuation you think is realistic at exit and multiply it by the slice you would sell.

Then list the costs you cannot convert to dollars. What can the funder reach if things go wrong? Does a director have to guarantee it? Which decisions now need someone else's consent? These do not belong in the maths, but they belong in the decision.

Last, check the timing on your side. How long will it take to get the money, and how much of your attention will it use? A raise can take months of founder time. A facility against a refund you are already owed is usually a short conversation.

When R&D finance is not the right tool

R&D finance only fits if your R&D is eligible and the refund is realistic. If your claim is small next to what you need, it will not close the gap. If you need capital for growth that has nothing to do with your R&D spend, equity or debt may suit better. If you are not yet registered for the R&D Tax Incentive, sort that first.

I would rather you hear that from me now than find out on the call. Funding that fits your situation is worth more to you than funding you were talked into.

Already have a bank facility?

You can usually add R&D finance alongside it. A general security agreement tends to cover all of a company's assets, which on paper includes the refund. The fix is a deed of priority, where the bank agrees the R&D financier sits ahead on that one asset and nothing else about its position changes. Banks sign these routinely, because the refund was never part of what the facility was priced against.