Can I get an SR&ED loan if my bank has me in special loans?

In practice, no. Once your bank has moved your file to special loans or put you in default, an SR&ED lender will almost always have to decline, no matter how strong your claim is.

This one is for founders and CFOs whose numbers are slipping but who are still in good standing with their bank. That's the window that matters.

The situation

A consulting services company applied to us for an SR&ED loan. It had been operating for the better part of a decade and, for most of that time, it made money. Then AI changed its industry. Clients expected the same work for less, margins compressed, and there was simply less business coming in. Revenue was declining and the company was running at a loss.

The SR&ED side looked good. The claim was in the $200,000 to $400,000 range, expected to come in a little smaller this year, and an experienced consultant had prepared it carefully. Underwriting went well. Declining revenue and negative earnings don't rule a company out on their own.

Then we reached a standard question on our application: are you in good standing with your senior lender? The answer was no. Their bank had moved them to special loans, the group that manages accounts the bank is worried about.

How we looked at it

There were two problems, and either one would have been enough.

The first is security. We take first priority security on the SR&ED claim, and when a company has a bank, we sign an intercreditor agreement so everyone knows who gets paid from what. A bank's special loans group is trying to protect its position, not hand part of it to someone else. In my experience, a bank with a borrower in default will almost never agree to let another lender go first on any asset, the SR&ED refund included.

The second problem is worse. Even if the bank had agreed, it could still push the company into insolvency at any time. As a junior lender, we'd have no way to stop that. The refund could land in the middle of a process we don't control.

Timing makes that risk real. We most often lend against accrued SR&ED and the CRA generally processes a claim in about 60 days if it isn't reviewed, and about 180 days for a refundable claim under review (CRA: After you claim). That's a long time to hope a bank in workout mode stays patient.

So the real question was: how does this company get out of the hole? Looking at the financials, I couldn't see a clear path. Revenue wasn't down because of a slow quarter. The business itself had changed.

The decision

Declined. The claim was good and the rest of the file was clean, but the chance of insolvency before the refund arrived was too high. We don't lend into that position, and I'd rather say so early than drag a founder through weeks of diligence.

A refund advance buys time. It doesn't fix a business, and it can't outrun a bank that has already decided to act.

What to do instead

1. Arrange SR&ED financing while you're still in good standing. If your numbers are slipping, talk to an SR&ED lender before the bank moves your file. Part of an advance could even go toward paying the bank down to keep you out of default, subject to the bank agreeing to the intercreditor terms. Remember it's still a loan, and it's owed even if CRA reduces your claim.
2. Look at other non-dilutive options. Grants and other government incentive programs don't add another lender to an already crowded table.
3. Raise equity from existing or new shareholders. It costs you ownership, and it's harder to raise from a weak position, but it may be the realistic option once new debt is off the table.