Kenneth G.H. Baldwin, Bruce Chapman, John H. Howard, and Glenn Withers
Introduction
It is now well understood that there is a significant shortfall in the availability of development finance in Australia - capital that supports businesses during their early and growth phases. This type of financing is essential for enabling investments in talent, business infrastructure, and innovation, which underpin our long-term economic growth (Howard, 2024, 2025).
Globally, countries like Germany and South Korea have long recognised the strategic importance of such development finance. Germany’s Kreditanstalt für Wiederaufbau (KfW) and South Korea’s government-backed industrial banks provide targeted funding to businesses in critical sectors, prioritising economic resilience over short-term returns. The British Business Bank similarly supports small businesses through loans, guarantees, and equity investments, driving regional growth and innovation (Howard, 2025).
We take as given that there are major financing issues for business R&D investment in Australia. The poor international comparative performance of our commercial R&D is certainly consistent with this perspective. According to the latest OECD data, Australia's gross domestic expenditure on research and development (R&D) is 1.66% of GDP, well below the OECD average of 2.7% (DISR, 2025).
We make the case here for a new financing mechanism for government R&D support (Baldwin, Chapman and Withers, 2025). This involves the use of “revenue-contingent loans” (RCLs), a policy based on the role of government as a risk manager (Moss, 2002).
What is a Revenue-Contingent Loan?
RCLs are a financial instrument in which money is provided to eligible firms in the form of a loan. However, the loan differs from normal commercial and typical government concessional loans. With RCLs, debt repayments are proportional to future revenue and are required only when the firm can repay; this is what economists call a “contingent debt”.
In concept, the idea is like Australia’s Higher Education Contribution Scheme (HECS), in which students are provided with a benefit by not having to pay tuition when enrolling for a university degree. This debt is then repaid only when graduates can afford to do so, depending on their future incomes, providing graduates with insurance in the form of not having to repay in periods when they can’t afford to.
An RCL would also provide insurance to a small business debtor, and in this way, HECS and an RCL have in common protection against the consequences of loan repayments when financial circumstances are adverse. However, in practice, RCLs for businesses require a different approach from HECS for students, as explained.
How Does an RCL Work?
A qualifying business, with eligibility determined by the government, would apply for an RCL. The maximum amount to be accessed would be capped, depending on a firm’s past annual revenue experience; this information is easily available from the Australian Taxation Office (ATO). The cap could be something like 50% of the company's average annual revenue for the past 2-3 years, with an upper limit on the cap that the government could determine. For startups with little or no prior revenue, the government could also set a lower limit on the amount that can be accessed.
The government would provide the loan (which could come from a bank if that mattered for the Budget), and the debt would be recorded with the ATO. Every quarter the revenue reported via the firm’s Business Activity Statement would activate partial debt collection, with repayments set at a low percentage of revenue, for example, five per cent. Further, the repayment would only be triggered once the firm had returned a profit following the loan to ensure that the repayment of the R&D investment did not adversely affect the company's viability.
Let us assume a firm with a $400,000 revenue stream history borrowed $200,000 at the 50% cap level, and in the first year after the loan, the firm returned a profit with a recorded revenue again of $400,000. Therefore, the RCL in that year would require a repayment of five per cent of this, which is $20,000. If this average revenue experience were replicated in the ensuing years, the RCL would be completely repaid within a decade. The government could subsidise the process if it so chose, by requiring that less than the full amount is repaid.
Some simple modelling using different scenarios of debt levels, interest rates, and collection parameters have been undertaken based on existing firm data, and they all yield the same result. This is that RCLs for both farms (Botterill, Chapman and Egan (2004) and business generally (Chapman and Piggott, 2020) would lead to 100% of repayments within a decade for continuing businesses, and very high proportions for businesses as a whole.
What are the Benefits for Borrowers of an RCL?
As noted, RCLs are quite different from typical loans because no repayment of the debt or only very low repayment is required when the borrower's financial circumstances are poor. This is an important feature in Australia’s contemporary economic environment, where uncertainty in the financial well-being of small businesses is very high. An RCL means that firms can access a loan without major concerns associated with repayment difficulties, and even in very poor financial circumstances, the potential costs of bankruptcy from an incapacity to repay a loan can be avoided.
This does not mean that RCLs should be promoted as a major replacement for either bank loans (it is not, after all, a function of government to organise and control commercial credit) or other government subsidies used to promote R&D. There might be good reasons why different financial instruments are available simultaneously to suit business circumstances for financing innovation projects.
What are the benefits for the Government of an RCL?
A major benefit for a government instituting RCLs to finance R&D for business is that the authorities have control over the extent of financial public commitment. Grants have the major cost associated with all non-loan approaches in that there is no potential for getting any money back, meaning that the coverage and extent of support are heavily budget-constrained. However, with an RCL there is the prospect of significant returns to the government from future loan repayments, which necessarily enhances the prospects for wider and deeper government R&D support.
In addition, the administrative simplicity of the collection of RCLs compares well relative to the findings of the Senate Innovation Enquiry (2015) concerning the R&D Tax Incentive program, which was described as complex, inefficient, and more beneficial to larger companies, leaving small-to-medium enterprises (SMEs) disadvantaged. RCLs can be designed to be easily accessible by all companies, including very small startups.
The administrative arrangements involving RCL
The first operational point of an RCL is to distinguish this type of loan from the income-contingent loan (ICL) variety, which defines HECS. HECS uses individual income as the basis for debt repayment, which is appropriate for a system targeted mainly at wage and salary earners. ICLs do not apply to company structures, and the ‘income’ represented by company profits could be gamed if the repayment amount were to be determined solely by company profit levels.
Botterill, Chapman and Egan (2004) examine what might be the most efficient basis for collecting contingent debt from farmers provided with loans in times of drought, and farm revenue is shown as the best way to ensure the instrument would be effective. Since most farms are simply a subset of Australian small businesses the collection issues developed and resolved in that study are pertinent to how an RCL would work for all small businesses.
The key debt collection administrative processes for business RCLs are:
(i) The debt would be tied to the firm’s unique Australian Business Number;
(ii) The reporting of revenue is a legal quarterly requirement of all businesses, through the Business Activity Statement, and cannot be avoided;
(iii) Unlike profits, revenue cannot legally be manipulated to suit the timing of repayments for an enterprise; and
(iv) While the basis of collection is revenue, this would only be triggered once a firm has positive profits to minimise the impact on the company's viability.
Of course, there are many possible collection options for an RCL, such as making the proportion of revenue required for repayments progressive (as happens for HECS for personal incomes). These are matters for policy decisions, our point being that irrespective of the application, the policy is robust in having effective future repayment streams.
The Applicability of RCL Reform for R&D
All companies could benefit from this RCL scheme, although governments may decide to place a revenue limit on the size of companies that can apply. The Strategic Examination of R&D discussion paper (DISR, 2025) notes, "For any business, R&D … can be a lengthy process, and businesses may not see returns on their investment for years. This can make it difficult to justify deep investment in R&D. Especially for small businesses that need immediate cash flow to develop and maintain their core business.”
The proposed RCL scheme addresses this by providing an immediate capital injection that need not be paid back until the firm returns a positive profit, and then only as a small percentage of revenue. Even then, the repayment is gradual over timeframes commensurate with realising the return on R&D investment. Additionally, governments may wish to introduce an initial grace period during which repayments are frozen.
The scheme is particularly well-suited to startup companies, which do not have track records suitable for most private finance. However, the real risk is the non-repayment of debt, so a careful vetting process is needed. This could comprise a combined research, business and government selection panel to properly assess the idea, the public benefit and the commercial capability of the startups.
Startups potentially have a higher failure rate than established companies, but policy options can reduce the risk of loan default. The selection process above provides partial de-risking, and very successful startups can potentially create increased taxation revenue for government that may mitigate losses from companies that fail and default on their RCL. Successful startups whose revenue exceeds a certain threshold could also be required to return a premium to offset loan defaults.
An initial pilot scheme for startups from university research would improve knowledge transfer from research to industry, encouraging universities to be industry-linked. A wider scheme across other SME businesses could follow once the initial pilot is established, enabling fine-tuning of the scheme to proceed with confidence, depending on satisfactory results from the pilot.
References
John H Howard (2025), “Beyond Startups: Thinking About Australia’s Technology Policy for Lasting Innovation”, Acton Institute for Policy Research and Innovation, Canberra.
John H Howard (2024), “The Capital Market Conundrum: Can Australia Keep its Innovation Edge?”, Acton Institute for Policy Research and Innovation, Canberra.
Ken Baldwin, Bruce Chapman and Glenn Withers (2025), “HECS for Startups: Revenue-Contingent Loans to Bridge the ‘Valley of Death’”, Submission to the Productivity Commission ‘Productivity Pitch’, Canberra.
Linda Botterill, Bruce Chapman and Michael Egan (2004), “An Income-related Loans Proposal for Drought Relief for Farm Businesses”, Australian Journal of Public Administration, Vol. 63 (3) (September): 10-19.
B. Chapman and J. Piggott (2020): Transitioning from Job-Keeper. CEPAR Working Paper 2020/09.
DISR (2025), Strategic Examination of R&D: Discussion Paper, Strategic Examination of R&D independent expert panel.
David Moss (2002), When All Else Fails. Government as the ultimate risk manager, Harvard University Press, Massachusetts.
Senate Innovation Enquiry (2015), Senate Inquiry into Australia's Innovation System.
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