Tax Credits Financing Explained

If you’re ready to scale your company and seize time-limited opportunities, you need up-front capital. And there are few things more frustrating than knowing cash is coming your way – but being powerless to speed it up. 

Enter tax credit financing: a solution that uses taxes to provide financial certainty. Let’s dive into what a tax credit advance is and how it could be a game changer for your company.

From property development to software engineering, UK companies in all corners of business can benefit from generous tax incentives. The big ones are research and development tax credits, VAT refunds, and creative tax credits, and they can yield credits worth between 20-33% of your eligible spending.  

Here’s where it gets interesting for businesses investing heavily in their growth. If your outgoings exceed your incoming payments (in other words, you make a loss), then you can get your entitlement in the form of a payable credit – in other words, cash. The same goes if you’ve collected more VAT than you’ve paid.

How much you receive depends on the type of tax scheme and, of course, how much your eligible spending comes to in the first place. Payouts for loss-making SMEs often total six figures and up.

Unfortunately, this pot of extra capital comes tied with uncertainty and frustration – like spending up to 40 hours to do each claim, not knowing whether HMRC will pay out in three months or twelve, and fruitlessly chasing for answers. 

Tax credit financing lets companies press fast forward and get their capital quickly, as an instant payment of their future HMRC credit. 

This is exactly what Adsum offers.

Out of the small handful of UK companies that offer tax credit advances, we’re the only ones that can do it in as little as 60 minutes from submission.

When a company uncovers an exciting but expensive opportunity for growth, two funding options typically come to mind – taking out a traditional loan or selling their equity. There are also other alternative finance models, such as revenue-based finance.  

How does it all compare for a company that needs to raise capital quickly?

Debt financing 

Let’s say you decide to go to a senior lender, such as a bank, and apply for a debt facility. You’ll likely wait 3-6 weeks for approval and potentially lose financial agility due to covenants and warrants. You may not even know how much you can get until it’s approved, and, of course, there will be a reasonable markup on the capital. 

Private equity

So maybe you try equity financing – again, it can be slow, and integrity and autonomy are at stake. It essentially sells a stake in your business and investors can place heavy demands on you. It’s an expensive way to raise capital; most investors require between 10-20x return. While private equity financing – such as venture capital – is gaining momentum in the UK, only approximately 0.3-0.6% of new companies raised a first round in 2020. Although startups and scaleups are more likely to gain VC funding than in the EU, successful application is far from guaranteed. 

Revenue-based financing 

With options looking limited, you might turn to alternative models such as revenue-based financing, which has recently created a lot of excitement in fintech. It works a bit like a student loan. You take out a facility, which is then reclaimed as a percentage of your revenue.

It’s cheaper than selling your equity but you’ll still pay between 1.5-2.5x for every pound you borrow. And the main drawback is that most revenue-based financiers require you to have a minimum monthly revenue, ruling it out as an option for pre-revenue companies. 

Getting a tax credit advance doesn’t rule out the finance options above – in fact, it helps you maximise your leverage even more when it’s part of your overall funding stack. It makes credit available to a lot of companies who struggle to qualify for other types of finance, for example:

• You don’t need to be generating revenue or pitching a profitable business case; you simply need to be spending in the right areas
• You can be making a loss 
• You need to be eligible for tax credits 

A tax credit advance can make up for the shortfalls of other slow, expensive and inconvenient forms of funding.

Adsum offers non-dilutive finance that companies can claim in a matter of clicks. The advance is secured against tax credits already earned, which essentially removes the repayment risk of taking out a loan. Here’s how an Adsum advance measures up. 

Control

With Adsum, we continually update and notify you of your entitlement, and you can utilise your funds whenever you need – putting you in the driver’s seat when it comes to your finances.

The benefits include more intelligence over your tax credit assets, financial certainty, a smoother balance sheet, and one less thing (HMRC being slow) to worry about.

Convenience

You can find out how much you’re owed within a few clicks, by simply verifying your identity and linking your accounts.

We don’t line up hoops for you to jump through and we never make you search for information we can find out easily ourselves. Plus we handle the whole HMRC reclaim process from start to finish, which could save you up to 40 hours of admin per claim. 

Speed

Unlike other forms of finance, you’ve already earned your tax credit payout – it’s just sitting in the queue at HMRC. Our proprietary software calculates how much is coming your way and we go and get it for you. That’s why we’re both happy and able to release your funding in as little as 24 hours. 

Risk level

When you get a traditional loan, there’s an inherent risk taken on by both the lender and the borrower. The lender will likely place stipulations on you, including what you can do with your businesses (whether you can take out other loans, or sell certain assets). That’s not ideal if you’re a fast-moving, growth-hungry company that needs financial agility. You’ll also have to worry about paying the loan back.

Like a traditional loan, Adsum’s advances come with a small monthly processing fee and an agreed repayment structure. The difference is that your repayment is already guaranteed through your earnings validation. We take repayment directly from HMRC, so there are no future charges coming off your balance sheet either. 

Speak with our friendly, expert team about the ways we can help you get instant access to your tax credits.