Cash pooling and R&D grant management for biotech and deeptech companies

Understanding Cross-Border Cash Pooling for Biotech Startups

Your biotech or deeptech startup operates with a US parent company and a brilliant research team in the UK. You just secured a major NIH grant, and the funds have landed in your Delaware bank account. Now, you need to pay salaries and lab expenses in London. This raises a critical question: how to manage international biotech grants and payments without creating a compliance nightmare for investors and grantors? Sweeping funds into a single pooled account without proper tracking is a direct path to breaching donor restrictions, triggering audits, and losing the trust you worked so hard to build. This isn't a complex treasury problem for a large corporation; it's a foundational discipline for survival and growth, ensuring every dollar is accounted for and serves its intended purpose.

For an early-stage company, "cash pooling" isn't about a sophisticated treasury system. The reality for most pre-seed to Series B startups is more pragmatic: your parent company acts as a centralized 'in-house bank' for its subsidiaries. The goal is to gain a consolidated view of your cash across different countries and legal entities while maintaining strict controls. Investor capital and grants land in the parent entity, and funds are disbursed to international teams as needed. The key is distinguishing between physically moving money and virtually tracking it. Instead of opening dozens of separate bank accounts, you use your accounting software, like QuickBooks or Xero, to create a virtual ring-fencing of funds. This is achieved by using features like classes or general ledger codes to tag every transaction by its source, whether it is restricted grant money or flexible investor capital.

A Framework for Managing Cross-Border Funds

A disciplined approach to global cash management for startups involves segmenting your funds based on their source and intended use. Each type of capital—grant, investor, and revenue—carries different obligations and risks. Here is how to handle each one correctly.

Part 1: Managing Restricted Grant Funds (The "Do Not Co-mingle" Money)

Grant money from government bodies comes with strict rules. Grantors like the NIH (National Institutes of Health) in the US or Horizon Europe have stringent compliance and reporting requirements for fund usage. They need to see a clean audit trail showing their money was spent on approved R&D activities, not on general corporate overhead. The money has a job to do, and your accounting must prove it did that job. Sweeping these grant funds into a pooled account without tracking their original purpose risks serious compliance breaches, reputational damage, and potential claw-backs.

To move these funds correctly, the transaction must be structured as a payment for services or an advance for specific work, not just a generic transfer. This documentation answers the critical question of how to use your US-based NIH grant to pay your UK-based research team without violating the grant's terms.

Wrong Way: Your US parent company receives a $250,000 NIH grant. You wire $100,000 to your UK subsidiary's main operating account. In QuickBooks, the transaction is recorded as "Intercompany Transfer." The funds are now co-mingled with other cash, making it nearly impossible to prove to the NIH how that specific $100,000 was spent on grant-approved activities.

Right Way: The US parent and UK subsidiary have an intercompany agreement outlining the R&D services the UK team will perform. The UK subsidiary invoices the US parent for £80,000 (the equivalent of $100,000) for "Q3 Preclinical Research Services under NIH Grant #XYZ." The US parent pays this specific invoice. The movement is now clearly documented as a payment for grant-related services. In your accounting ledger, the expense and the corresponding cash outflow are tagged to the 'NIH Grant #XYZ' class, creating a perfect, auditable trail.

Part 2: Pooling Investor Capital for R&D and Runway (The "Flexible But Watched" Money)

Investor capital is more flexible than grant funding, but your board and future investors still demand absolute clarity. When your cash is spread across entities in three different countries, showing a consolidated cash position and true runway becomes a challenge. A scenario we repeatedly see is a founder struggling to explain three different bank balances on a pitch deck, creating confusion and undermining confidence. This is where the 'in-house bank' model provides the cross-border fund consolidation you need.

Venture capital typically lands in the US parent entity. From there, it is deployed to subsidiaries to fund operations. The primary mechanism for this is a formal intercompany loan. When the UK subsidiary needs cash for payroll, it requests a drawdown from the US parent under a simple, documented intercompany loan agreement. The parent wires the funds, and both entities record the transaction: one as a loan receivable, the other as a loan payable. This avoids the appearance of messy, undocumented cash movements and provides the real-time visibility needed to calculate a reliable, consolidated runway. This clean structure is essential when preparing for financial due diligence in your next funding round, as it demonstrates sophisticated financial management, even with a small team using your existing accounting tools.

Part 3: Handling Milestone and Licensing Revenues (The "Tax-Sensitive" Money)

As your biotech matures, you might receive your first revenues from a licensing deal or a research milestone payment. This is a critical milestone, but also one fraught with tax risk. If your EU subsidiary receives a €1M milestone payment, the instinct might be to move it to the US parent's bank account. This can be a costly mistake. Improperly documented intercompany movements of revenue can trigger unexpected tax issues. Regulators may view the transfer as a dividend or distribution, resulting in withholding taxes on cross-border fund movements that can be as high as 30%. This means a surprise €300,000 tax bill.

To move this cash compliantly, the movement must be justified as a payment for legitimate services. This is where transfer pricing principles and intercompany service agreements become important. The US parent company typically provides its subsidiaries with valuable services like executive management, strategic direction, fundraising support, and intellectual property management. The service agreement establishes a formal basis for the subsidiary to pay the parent for these services. The milestone revenue received in the EU can then be used to pay the parent's invoice for its management fee. This properly documents the cash movement, satisfies tax authorities in both jurisdictions, and ensures the cash lands where it is needed without a significant, unexpected tax haircut.

Your Biotech Cash Pooling Playbook: A 3-Step Framework

Implementing a disciplined cash pooling strategy does not require enterprise software. It requires a clear framework executed within your existing accounting tools. This approach provides robust international grant management and biotech treasury solutions without the overhead.

1. Segregate and Tag in Your Ledger
   The foundation of control is virtual ring-fencing of funds. Before the first dollar of a new grant or investment round is spent, set up your chart of accounts to track it. In QuickBooks, this is typically done using the 'Classes' feature. In Xero, you would use 'Tracking Categories.' Create a distinct class or category for each major funding source, such as:
   • Investor Funds: Series A
   • Grant Funds: NIH-Grant-123
   • Grant Funds: Horizon-EU-456
   • Revenue: Licensing-Partner-A
   Every single transaction, whether income or expense, must be tagged with the appropriate source. This setup ensures you can instantly generate reports that show the financial position of each funding pool.
2. Document Every Cross-Border Movement
   Every wire transfer between your legal entities needs a clear purpose and a paper trail. An entry in your bank feed is not enough. Before moving cash, define its purpose. Is it a payment against a specific invoice for grant work? A drawdown on a formal intercompany loan? A settlement of a management fee per a service agreement? This documentation is your primary defense in an audit. For intercompany movements of investor capital, a simple but formal intercompany loan agreement is essential to establish the terms and legitimacy of the fund flows.
3. Reconcile and Report by Fund Source
   With the setup from Step 1 and the discipline from Step 2, reporting becomes powerful. You can now run reports like a 'Profit & Loss by Class' in QuickBooks. This allows you to show grantors the precise expenditures against their funds. It lets you show your board how investor capital is being deployed across geographies. This level of reporting is crucial for managing compliance with accounting standards like FRS 102 in the UK or US GAAP, particularly ASC 730 for R&D costs. It also provides the necessary data for tax filings, such as capitalizing R&D costs under Section 174 of the U.S. tax code or claiming credits through the HMRC R&D scheme in the UK. You can review the official HMRC guidance on cash pooling for further details.

Conclusion

For an early-stage biotech with international operations, effective cash management is a core operational necessity. Mastering how to manage international biotech grants and payments is about discipline, not expensive software. By treating cash pooling as a system of virtual ring-fencing, meticulous documentation, and source-based reporting, you build a resilient financial foundation. This proactive approach prevents compliance issues, provides clear visibility to stakeholders, and ultimately allows you to focus your energy and capital on what matters most: the science. To learn more, continue exploring our multi-currency cash pooling hub.

Frequently Asked Questions

Q: What is the difference between physical and notional cash pooling for a startup?
A: Physical pooling involves sweeping funds into one master account, which is complex and risky for startups. Notional pooling, the recommended approach, means funds stay in separate legal entity accounts but are tracked virtually. You use accounting software to get a consolidated view without co-mingling restricted funds.

Q: Do we need a complex transfer pricing study for our intercompany agreements?
A: Early-stage startups generally do not need a formal, expensive transfer pricing study. However, you must have a documented, logical basis for any fees or loan interest between entities. This could be a simple agreement that outlines the services provided and establishes a reasonable management fee, demonstrating commercial substance to tax authorities.

Q: Can fintech tools help with managing foreign currency accounts?
A: Yes, modern fintech platforms can simplify global cash management for startups. They offer multi-currency virtual accounts that allow you to hold, receive, and pay in different currencies from a single platform. This can reduce conversion fees and administrative burden, complementing the virtual tracking strategy in your accounting system.

Q: How does this disciplined fund tracking help with R&D tax credit claims?
A: Both the US and UK offer significant R&D tax incentives. To claim them, you must provide detailed evidence of qualifying R&D expenditures. By tagging every R&D transaction by project and fund source, you create a clean, auditable record that makes it straightforward to prepare and defend your tax credit claims with the IRS or HMRC.