How to finance new product development

Bank loans

Getting a business loan from your bank can help you secure the capital you need to develop new products and expand your operations. Consider whether long-term financing is the right move for you.

Tax credits

Applying for a tax credit can require a fair amount of paperwork, but the size of some of the credits available can make it worth your time. For instance, the federal Scientific Research and Experimental Development (SR&ED) program provides tax credits worth up to 35% of qualifying expenditures, which can include salaries, capital costs, consulting fees and materials. For most businesses, these investment tax credits take the form of a cash refund.

In addition, most provincial and territorial governments—all except Prince Edward Island, the Northwest Territories and Nunavut—offer their own research and development (R&D) tax credits.

Grants and subsidies

Depending on your business sector, you could also have access to federal government grants and financial assistance or provincial and territorial grants and financing programs.

For example, the National Research Council (NRC) administers the Industrial Research Assistance Program (IRAP), which offers non-repayable financial assistance covering 80% of salaries and 50% of contractor costs. The Natural Science and Engineering Research Council (NSERC) also offers a wide range of grants meant to help businesses collaborate with the country’s top academic researchers.

Another program that can help with personnel and wage costs is Mitacs. The Mitacs Accelerate program allows you to expand your R&D program for an investment of $7,500. With the help of a government matching grant, you’ll be able to hire a graduate student or post-doctoral fellow for a four-month internship. The intern remains a student at the university, meaning you do not have to manage the financial and administrative issues of hiring a new employee.

Outside investors

Outside investors—such as angel investors, venture capitalists, or “love money” (from family and friends)—is another way to get the funding you need to innovate. Angel investors tend to be wealthy individuals or retired corporate executives who invest directly in small companies. They can offer their experience and network as well as technical and management knowledge. Angels tend to focus on young businesses and make investments of $25,000 to $100,000, while institutional venture capitalists usually provide financing in the range of $1 million or more.

How to get financing for new product development?

According to Nadia Forgione, a manager with the Virtual Business Centre at BDC , you need to do some legwork before seeking financing for a new product. This starts with research to show that there is, in fact, a market for your product, and could involve conducting surveys, focus groups or other analyses.

Make sure you do that analysis before spending large sums, she advises. And when it comes to financing, “you want to be quite far along in your product development before you apply.”

Whether you’re looking for financing from a bank, government agency or outside investor, you’ll need a solid business plan that demonstrates the viability of your project. But the criteria may vary depending on the type of financing you choose:

Applying for bank loans

• You’ll need to be able to show that the funds will have a positive effect on your profits.
• You will also need to provide financial projections that include a monthly cash flow forecast for the remainder of the current year and the following 12 months.
• In some cases, the bank may ask for two years of projections.

Applying for Federal or provincial tax credits

Preparing a SR&ED application can be time-consuming. It also requires knowledge of tax laws and the ability to convey information about the project in lay terms.

• Your business must show evidence of "experimental development.”
• Businesses should submit their SR&ED claims with their income tax returns for the year.

Applying for grants or subsidies

Each government program has different requirements. For instance, to qualify for an NSERC grant, you will need a scientist or engineer with whom to collaborate on a research project. To qualify for an IRAP grant, you need to show that you can cover the remaining 20% of costs in salaries along with half of your subcontractor costs and any other expenses not covered by the grant.

Attracting outside investors

“Another investor could be a silent partner—someone who may not have the business know-how, but has the cash to help,” says Forgione. To attract an outside investor, you will need to “sell” them on your idea.

• They will likely want to see annual financial projections that stretch out to five years.
• You will probably also need a product prototype, demo or minimum viable product to convince them to invest.

How to select the right financing solution

The best type of financing will depend on whether you are a new or well-established business as well as on your sector and stage of product development.

“When you're about to deliver a product that's complete, and you can guarantee that the sales are going to come in, then a business loan is probably the best option,” explains Forgione. “But if you're at the invention stage, you might need to have some partners around the table to help you.”

Regardless of the type of financing you choose, Forgione says it is critical that you “do your homework and know what you’re getting yourself into.”

If you decide that working with a financial institution is the best fit, it’s important to be transparent.

“I think of a banker as a best friend,” explains Forgione. ”We can help because we are in a more neutral position. We tend to ask a lot of questions that can help a business figure out the best path forward.”

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