Guidance

Competition Document: Defence Innovation Loan

Updated 7 May 2024

1. Introduction

The Defence and Security Accelerator (DASA) supported by Innovate UK Loans Ltd (Innovate UK) are working together to offer a Defence funding competition: the Defence Innovation Loan. This service provides an opportunity for single small and medium enterprises (SMEs) with solutions to Defence themed problems to apply for a Defence Innovation Loan of between £100,000 and £2 million with a below market interest rate of 7.4% per annum. This loan can be used to cover up to 100% of eligible project costs to aid the commercialisation of the solution. Innovate UK provide further information on innovation loans (not Defence specific) here.

DASA will conduct a full innovation assessment by defence stakeholders on submitted applications, focusing on desirability, feasibility and viability of the solution, as per the standard DASA competition process. It should be noted that the standard DASA Terms and Conditions will not apply to applications deemed acceptable and instead, the Innovate UK Innovation Loans Terms and Conditions (see Summary of general Terms and Conditions) will apply should the application be acceptable to be considered for an Innovate UK Innovation Loan.

In conjunction with the DASA assessment, Innovate UK will also undertake a credit evaluation of your business to assess suitability for a Defence Innovation Loan. These checks will include suitability to make repayments and the strength of the company management team to deliver against the plan.

DASA will then consider the applications at a Decision Conference taking into account the outcome of both the DASA assessment and the Innovate UK credit check. Businesses which are recommended for funding at this ‘initial outcome’ stage will be subject to a detailed loan suitability assessment by Innovate UK.

Innovate UK will offer successful applicants the opportunity to take out a loan to help convert a mature innovative solution into a viable business proposition which may be capable of competing for Defence procurement.

2. Webinar

On 13 June 2023, DASA and Innovate UK hosted a webinar to answer questions about Defence Innovation Loans, where viewers spoke to our panel of experts about how to submit a successful application.

3. Eligibility

To take on a Defence Innovation Loan for a project you must:

• be a UK registered SME
• intend to exploit the results in the UK or overseas to make a significant and positive impact on the UK economy and / or productivity
• give evidence that your business is suitable to take on a loan.

Only SMEs are eligible to apply for Defence Innovation Loans; individuals, academic institutions, research organisations and large companies are not eligible. Only single businesses can receive innovation loans, so joint applications with other organisations cannot be funded in this competition (subcontractors are allowed, see further details below). For more information on company sizes, please refer to the company accounts guidance (this is a change from the EU definition unless you are applying under State Aid).

3.1 Subcontractors

Subcontractors are allowed in this competition and must be selected through a participant’s normal procurement process. Subcontractors can be from anywhere in the UK. If an overseas subcontractor is selected, a case must be made as to why no UK-based subcontractors can be used including a detailed rationale, evidence of UK companies that have been approached and reasons why they were unable to participate. Russian subcontractors are not permitted under current restrictions (see ‘What are we NOT looking for?’ below). Cost is not deemed as a sufficient reason to use an overseas subcontractor.

3.2 Multiple applications

Your business can only submit one application per Defence Innovation Loan competition cycle. If you submit more than one application, only the first application will be considered for assessment.

No Innovate UK loan must have been requested or awarded for the same project.

4. Funding

Loans of between £100,000 and £2 million will be offered; applications requesting loans outside of these amounts will be ineligible and will not be considered. We will ask you to detail the total costs required for your technical project plan. If you are not requesting a loan to cover all of these costs we will ask you to indicate this and detail where the rest of the funding will come from and how much it is. The amount offered will be based on your technical project plan and Innovate UK’s judgement of the suitability and affordability of a loan for your business. The Innovate UK Loans Ltd credit committee will decide the final terms, amount and length of the loan offer.

Innovation loans will be:

1. Available for up to 3 years to cover project development costs when the project is under way, but the exploitation has not yet started (the ‘availability period’). You can borrow in stages (‘drawdowns’) quarterly in advance during this period and will pay interest at 3.7% per annum on anything you borrow, with additional interest at 3.7% accrued and deferred until the repayment period.

2. Extended until the first commercial sales from the results of the project, up to a maximum of 2 further years (the ‘extension period’) after the end of the availability period. You will not be able to make further drawdowns during this period. You will not have to make repayments but you will pay interest on the amount you have borrowed at 3.7% per annum, with additional interest at 3.7% accrued and deferred until the repayment period.

3. Repayable over a maximum of 5 years (the ‘repayment period’) after the availability and extension periods. You will have to repay anything you have borrowed, including interest accrued and deferred from the availability and extension periods, on a quarterly schedule. You will pay interest at 7.4% per annum on the outstanding loan amount.

These are the longest periods that will be considered and, since the overall term of the loan must not exceed 7 years, your application should propose how long the project (which includes the availability and extension periods) will last and how long the repayment period should be. These should be based on the needs of your business. The suitability of your proposed timings will be considered in any loan offer that is made to you.

More details of our approach are set out in the ‘heads of terms’ Summary of General Terms and Conditions of the loan.

General guidance on innovation loans can be found here.

5. What are we looking for?

Innovations must be fairly mature at TRL 6 and above to ensure that the solution can be commercialised within the time scale of the innovation loan. Applications must clearly evidence a Defence need for the innovative solution. The applicant must include evidence of:

• a high quality later-stage R&D project with viable opportunity for growth
• a suitable team, with strong management and delivery approach to the project
• a strong defence requirement for the capability
• a clear route to commercial success and focus on growth or scale up
• a plan to cover interest payments on a quarterly basis
• a plan to repay the loan within 7 years of contract award
• why public funding is required in order to be able to carry out the project
• an explanation of why you are unable to fund the project from your own resources or other forms of private-sector funding
• clear evidence of development of a new and innovative product, process or service which can provide a competitive advantage over anything similar in the field
• a clear, evidence-based plan to deliver significant economic impact, return on investment (ROI) and growth through commercialisation, as soon as possible after project completion
• a drawdown schedule that adheres to the terms of the loan (i.e. up to 3 years availability period), and that matches the information provided to Innovate UK.

6. What are we NOT looking for?

For this category we are not interested in applications that:

• have not shown a strong Defence requirement and capability need
• are unable to afford the interest and repayments on the loan
• have not submitted both parts of the application, i.e. an application to DASA and an appropriate, evidenced Innovation Loan Request to Innovate UK; details of how to demonstrate this are outlined in Section 12 How to Apply)
• have not shown a clear route to commercial success with potential to make a significant and positive impact on UK Defence
• request a loan of less than £100,000 or greater than £2 million
• are not highly innovative research and development projects
• are consultancy, paper-based studies, market surveys or literature reviews
• are projects which purely conduct data science / analytics
• are PhD applications
• are projects that simply demonstrate or purchase existing equipment or off-the shelf products, without undertaking further development of technology or techniques to meet the challenges proposed (unless applied to this challenge in a novel way)
• are projects that offer no viable long-term prospect of integration into defence capabilities
• are projects which are already being developed elsewhere within UK defence
• are projects which are already being funded or in the application stage of funding elsewhere
• require procurement, commercial, business development or supply chain activity with any Russian entity as lead, partner or subcontractor; this includes any goods or services originating from a Russian source (under current restrictions, this competition will not fund such activities).

7. What should be included in your application?

There are two elements to the Defence Innovation Loan application:

• Innovation Application – submitted through the DASA submission service.
• Innovation Loan Request Application (Business and Financial Assessment) – submitted through the Innovate UK submission portal, detailed guidance on the application process can be found here.

7.1 DASA Innovation Application

When submitting an application, you must complete all sections of the online form and include an appropriate level of information to allow assessment of the bid. A list of other current or recent government funding you may have received for this project should be included if applicable. The following paragraphs outline the key information that should be included in your application to enable UK Government stakeholders to make a full assessment. Please note that Assessors will spend 90 minutes on each application, so you should ensure you include an appropriate level of information and detail to allow for the application to be given a full and thorough assessment in this time.

Value proposition statement

A short statement to summarise the value, usually using figures or percentages, of the project for UK Defence. For example, our X technology will reduce time, increase speed, allow more to be done, by Y amount for Z customer or group of customers.

Technical project plan

A technical project plan with clear milestones and staged drawdowns is required to outline the work that will take place in the availability period. Milestones must be well defined and designed to provide evidence of progress against the technical project plan; drawdowns will be subject to project progress, Innovate UK monitoring officer sign-off and financial and reporting covenants being met. Your application must demonstrate how you will complete all activities / services within the timescales.

Commercialisation plan

You may wish to outline plans to commercialise the project at the end of the availability period and how you might intend to support this. You might wish to include an outline of the expected market price, customer base, number of units to be sold etc.

Ethical, legal and regulatory factors

You must identify any ethical, legal and regulatory factors within your application, such as work involving humans or animals, and how the associated risks will be managed, including break points in the project plan if approvals are not received. MOD Research and Ethics Committee (MODREC) approvals can take up to 5 months, therefore you should plan your work programme accordingly. Please refer to DASA’s ethical legal and regulatory guidance to see whether your application will require MODREC or other regulatory approval, and contact DASA for further information if you are still unsure.

Government Furnished Assets (GFA )

GFA could be equipment, information or resources that are government-owned and loaned (on a free-of-charge basis) for your work. You should identify any incidences where you are in receipt of GFA (including examples) for the work you are expecting to carry out under the terms of the loan. If any GFA is required it is your responsibility to arrange this directly with MOD. Please note that being in receipt of a loan will not grant any preferential treatment with regards to the provision of GFA, and there is no guarantee GFA can be provided.

7.2 Innovation Loan Request

In order to enable Innovate UK to consider your suitability for an innovation loan you must provide further business and financial information. The following paragraphs outline the key information that should be included in your business and financial submission to enable Innovate UK to make a full evaluation.

Business information

You must provide us with information about your business by answering questions in the form of an online survey. These questions will cover:

• Business overview
• Loan request
• People / company structure
• Commercial activity
• Product development
• Finance and fundraising
• Growth challenges

Financial information

You must provide us with financial information by completing a financial submission spreadsheet and uploading it at the end of the survey. The financial information required includes historic and forecast information to cover the full period of the loan for:

• Profit and Loss
• Balance Sheet
• Cashflows

Financial commitment

Entering into a loan agreement with Innovate UK Loans Ltd is a financial commitment. You need to confirm to Innovate UK that the loan is for business purposes. You are wholly responsible for ensuring that it is the right approach to financing your business, that your business is legally allowed to borrow and you will be able to fulfil the repayment obligations under the loan. You should take expert advice before submitting an application. By submitting an application, you are providing authority for Innovate UK (and any subsidiary or agency appointed to assess your application) to do checks on the financial standing of your business. This might include, but will not be limited to, checks with credit reference agencies (which might be recorded on your record) to determine your credit standing, identity, beneficial ownership and control, and source of existing funds.

Failure to provide any of the above listed will automatically render your application non-compliant and it will be pre-sifted out prior to assessment.

8. Public facing information

When submitting your application, you will be required to include an application title, a value proposition statement and a short abstract. The title, value proposition statement and abstract you provide will be used by DASA, and other government departments, to describe the project and its intended outcomes and benefits. It will be used for inclusion at DASA events and included in documentation such as brochures. Therefore please ensure there is no confidential information in the title, value proposition statement or abstract of your application.

9. Subsidy Control and State Aid

9.1 Subsidy control

This competition provides funding in line with the UK’s obligations and commitments to UK Subsidy Control. Further information about the UK Subsidy Control requirements can be found within the EU-UK Trade and Cooperation agreement and the subsequent guidance from the Department of Business, Energy and Industrial Strategy (BEIS).

You could get a loan of up to 100% of your eligible project costs. Since the loan will have favourable terms (particularly a below-market rate of interest) the value of this benefit over the life of the loan will be the equivalent of a grant. The gross grant equivalent will be the present value, at the date of commitment of the loan, of the difference between the market cost of interest and fees of a similar loan (using reference rates for interest) and the cost of an innovation loan. For experimental development projects this grant equivalent, as a proportion of the eligible project costs, can be:

• up to 45% if you are a micro or small business
• up to 35% if you are a medium-sized business.

We expect that most innovation loans will meet this requirement. The general guidance on innovation loans contains more information about the use of a grant equivalent calculation for an innovation loan.

Innovate UK is unable to award funding to organisations that are considered to be in financial difficulty. Innovate UK will conduct financial viability and eligibility tests to confirm this is not the case as part of the credit evaluation of applications.

9.2 European Commission State aid

EU State aid rules now only apply in limited circumstances. Please see Innovate UK’s general guidance to check if these rules apply to your organisation.

9.3 Further information

If you are unsure about your obligations under the UK Subsidy Control regime or the State aid rules, you should take independent legal advice. We are unable to advise on individual eligibility or legal obligations.

You must make sure at all times that the funding awarded to you is compliant with all current Subsidy Control legislation applicable in the United Kingdom.   
This aims to regulate any advantage granted by a public sector body which threatens to or actually distorts competition in the United Kingdom or any other country or countries.

If there are any changes to the above requirements that mean we need to change the terms of this competition, we will tell you as soon as possible.

10. Competition process and assessment

Defence Innovation Loan applications will be evaluated on the quality of your technical project plan and the suitability of your business to receive an offer of a Defence Innovation Loan.

Your application will be subject to the full DASA competition process and assessed using the criteria as detailed on the competition process and assessment page.

Innovate UK will be carrying out the Defence Innovation Loan credit evaluation of this competition and, if successful, you will enter into a loan agreement and security agreement with Innovate UK Loans Ltd. Innovate UK’s Credit Team will assess the suitability of your business to receive the Defence Innovation Loan using the information provided in the business and financial questionnaire, including your financial spreadsheet submission. Innovate UK may need further information to be able to offer you a Defence Innovation Loan, at which point they may contact you. Innovate UK may decide against offering a Defence Innovation Loan if the information you provide does not make an adequate case for your company’s suitability.

DASA reserves the right to disclose, on a confidential basis, any information it receives from you during the application and assessment period to any third party engaged by DASA for the specific purpose of evaluating or assisting DASA in the evaluation of your application. In providing such information you consent to such disclosure. Appropriate confidentiality agreements (e.g. Non-Disclosure Agreements) will be put in place between DASA and the third party.

11. Funding type:

Defence Innovation Loan – Please see the Summary of general Terms and Conditions for an overall summary of the main terms and conditions of Innovate UK’s innovation loans.

11.1 Competition Terms and Conditions

Innovation loan suitability evaluation will be carried out by Innovate UK. Innovate UK will assess the suitability of your business to receive an offer of a loan. If a loan offer is made, you will enter into a loan agreement and a security agreement with Innovate UK Loans Ltd. You should note that for this service the standard DASA terms and conditions will not apply. Please see the Summary of general Terms and Conditions for a summary of the main terms and conditions of Innovate UK’s innovation loans.

12. How to apply

Applications must be submitted via the DASA submission service. If you are not already registered to use this portal, you can register here.

You must also complete the Innovate UK Loan Request application to complete your application, which you can do here.

You will need to start the DASA application form first and use Your Submission Number (starting ‘ACC’, found in the Summary section of your DASA application) in the Innovate UK application form.

Your application will not be processed unless both parts of the application (i.e. DASA and Innovate UK) have been completed.

13. Dates

The Defence Innovation Loans competition runs throughout the year in cycles. Assessment starts the day after the competition cycle closing date, subject to pre-sift checks to confirm eligibility.

A list of the cycle closing dates for Financial Year (FY) 23/24 is shown below. Applications must be submitted through the DASA Submission Service by midday on the closing date given.

Please note that future cycles are currently under review pending budget commitments for FY24/25.

Cycle	Competition Closes at Midday	Decision Date	Expected Feedback Released
FY23/24 Cycle 1	6 June 2023	26 July 2023	16 August 2023
FY23/24 Cycle 2	18 July 2023	6 September 2023	27 September 2023
FY23/24 Cycle 3	7 September 2023	27 October 2023	17 November 2023
FY 23/24 Cycle 4	17 October 2023	6 December 2023	17 January 2024
FY 23/24 Cycle 5	28 November 2023	6 February 2024	27 February 2024
FY 23/24 Cycle 6	9 January 2024	28 February 2024	20 March 2024
FY 23/24 Cycle 7	12 March 2024	8 May 2024	5 June 2024

14. Before you submit

Before submitting a full application, please speak with your regional Innovation Partner about your idea. To do this please contact DASA to arrange a discussion. As part of your application you will be asked to confirm that you have spoken to DASA regarding your innovation, and that DASA confirmed its suitability for the Defence Innovation Loans competition.

15. Help

For further general information about Innovation Loans from Innovate UK, please see the Key FAQs document; you may also wish to refer to the Top Tips for applicants. Please make sure you refer to the checklist and ensure all criteria are met before submitting.

Competition queries including questions about process, application, commercial, technical and intellectual property aspects should be sent to accelerator@dstl.gov.uk, quoting Defence Innovation Loan in the subject line. If you wish to be added to the mailing list for this service please email a request into the accelerator inbox, this will ensure you receive future updates on this competition.

While all reasonable efforts will be made to answer queries, DASA reserves the right to impose management controls if volumes of queries restrict fair access of information to all potential applicants.

16. Webinar Q&A

16.1 Webinar Questions & Answers 13 December 2022

Q: Do the DASA and Innovate UK assessments happen concurrently?

A: Yes, the DASA assessment (to establish the desirability, feasibility and viability of the technology) and the Innovate UK initial credit evaluation (based on the financial and company questions answered in the application) happens concurrently. Please note that both parts of the application (the DASA application form and the Innovate UK application form, including the financial spreadsheet) also need to be submitted concurrently.

If all of these initial assessments are satisfactory (DASA’s application form, Innovate UK’s form and financial spreadsheet), the application will be taken forward for further in depth credit analysis by Innovate UK.

Q: Are Defence Innovation Loans for short term cash-flow?

A: No, this funding is only for R&D work. It should be accounted for as a long-term liability.

Q: Is the loan amount included in the liquidity ratio (1.1:1) calculation?

A: No. The liquidity ratio takes into account current assets (cash, debtors, inventories) and current liabilities (trade creditors, loans falling due within 1 year and any other short term liabilities); the loan itself is a long term liability and therefore not included in the liquidity calculation. If you wish to seek further clarification, please contact your chief finance officer or a financial accountant.

Q: Does the loan count as ‘State aid’?

A: State aid is now only relevant in Northern Ireland (as part of the Northern Ireland Protocol). The rest of the UK now has UK subsidy control and therefore uses ‘minimum financial assistance’. Innovation loans are a form of subsidy but are not considered to be minimum financial assistance. They fall under an approved Innovate UK scheme as will be set out in the new legislation from January 2023. The subsidy is classed not as the loan amount, but as the benefit in the loan (difference between market rates and 7.4%). The financial projections tab on Innovate UK’s part of the application will automatically calculate this for you. It has to be below an intensity rate of 45%; Innovate UK is confident this will be the case for applicants to the Defence Innovation Loans. The loan does not count against your rolling allowance for minimum financial assistance.

If you are an applicant who is conducting activities that will affect trade of goods and/or electricity between Northern Ireland and the EU as envisaged by Article 10 of the Northern Ireland protocol, then you must apply under European Commission State aid rules. 

In order to be eligible to receive state aid, you must pass the ‘undertakings in difficulty’ test. This only applies to limited liability companies that are more than 3 years old. If you have a parent company, the test can be performed on your parent or holding company. If you are successful in the competition, we will apply this test as part of our viability checks.

Further information is available on the Innovate UK website in the general guidance under state aid.

If you are applying for an award funded under State aid Regulations, the definitions for company size are set out in the European Commission Recommendation of 6 May 2003.

Q: Can I claim small company R&D tax relief for the work funded by a Defence Innovation Loan?

A: These loans are classed as subsidising an R&D project, so companies in receipt will not be eligible to make a claim at the small company rate. They can, however, use the large company scheme (RDEC – Research and Development expenditure credit). We are unable to give specific advice, so companies are advised to consult with their tax, legal and financial specialists before they submit.

Q: What TRL is expected for innovations suitable for a Defence Innovation Loan?

A: Innovations should be TRL 6 or above, so that commercialisation is possible within a short to medium term timeframe and during the term of the loan (please refer to the competition document).

Q: Are start-ups and pre revenue businesses suitable for loans?

A: In very general terms, Innovate UK expects that a business is less likely to be suitable to take on a loan commitment if it is just starting out rather than if it is scaling its activities. Start up and pre-revenue businesses will be considered, but the following will be taken into account: the time expected until commercial revenue generation is likely to be achieved, the adequacy of capitalisation of the business, its level of pre-commercial traction and the breadth and depth of its management team. The business must be suitable to take on a loan and be able to meet interest and capital repayments when they fall due. Please note that in the event of default the loan would become immediately repayable and Innovate UK will exercise its rights under any security documents.

There may be other, more suitable forms of borrowing for start-up businesses.

It is advised that companies considering applying for a Defence Innovation Loan contact DASA with questions before completing the form.

Q: What are the timeframes from the loan submission?

A: If you apply to the next cycle, then you will receive an initial outcome by 14 March 2023 (please see the competition document for dates). If successful, the application will then undergo detailed credit analysis by Innovate UK, which usually takes a further 6 to 8 weeks for a final decision. During this time there may be questions that Innovate UK needs answered and the Innovate UK Credit Team will be in contact with the company throughout the process so that the relevant conversations can be had. How quickly the final report is presented to the Credit Committee depends to a large degree on how quickly the company is able to respond to the questions during this time.

In some cases, the Innovate UK Credit Committee will request a management presentation, with a final decision from the Credit Committee after that. Typical timescales for first loan drawdown can be around 20 weeks or so after the competition closes. The Credit Specialist will keep you updated all the way through this process so you will be aware of what is required and what the timings are.

16.2 Webinar Questions & Answers 13 June 2023

Q: I am new to the Defence Innovation Loans, who is the best person to contact for support?

A: For general queries, contact your local DASA Innovation Partner via the Contact DASA Form on the Get in Touch with DASA page, providing brief details about your innovation.

Q: How do I secure a loan for an innovation related to Crime Prevention?

A: The Defence Innovation Loans are only available for innovations relating to Defence. Crime prevention is not related to Defence, however it might be worth exploring whether there could be some Defence-relevant application of your innovation. We recommend contacting your local Innovation Partner via the Contact DASA Form to discuss this.

Q: What funding is available for SMEs who seek to develop low maturity innovations?

A: DASA funding is available for low maturity innovations, through themed competitions and the Open Call. We recommend you contact your local Innovation Partner, who can provide advice and guidance on the best route to the most appropriate funding, and whether your innovation is relevant to Defence or Security.

Q: How confidential is the applicant’s information in for the loan application, e.g. their Intellectual Property?

A: Applications are securely stored on Innovate UK (for financial and business information) and DASA (for defence innovation information) platforms. Those assessing DASA proposals are government employees; you can read about how we protect your intellectual property in the Your Proposal section of our DASA Standard Terms and Conditions page. Innovate UK has an obligation to treat all information as confidential; see the Innovate UK privacy notice and information management policy for more information. Please note that everything submitted to DASA must be at UK Official and not at a higher classification. If your application includes any highly confidential information please discuss this with your local Innovation Partner via the Contact DASA Form.

Q: Does having an existing debenture affect the evaluation of my proposal?

A: Innovate UK Loans Ltd will take a debenture - a fixed and floating charge over all the assets of the business. Where there is a charge in favour of a senior secured commercial lender (now or in the future), we will expect to be subordinated and cede priority through a deed of priority. We do not consider equity holders to be senior secured commercial lenders, so we would expect to have priority over their charge and would require them to cede priority to us in a deed of priority.

Q: Is there any support available for completing Innovate UK’s business questions, beyond your Customer Support?

A: Further details about innovation loans can be found here. We recommend seeking professional advice before taking a loan. Innovate UK’s customer support team answer general questions however cannot advise on specific responses to Innovate UK’s business questions. Innovate UK EDGE can provide additional support however they are unable to provide in-depth advice. Details are available from the Innovate UK website on how to contact the Innovate UK EDGE team.

Q: I am a start-up SME, can I apply for the Defence Innovation Loan?

A: In very general terms, we expect that a business is less likely to be suitable to take on a loan commitment if it is just starting out than if it is scaling its activities. Start-up / pre-revenue businesses will be considered, but we will take into account the time expected until commercial revenue generation is likely to be achieved, the adequacy of capitalisation of the business, its level of pre-commercial traction, the breadth and depth of its management team. Regarding your innovation and its applicability, contact an Innovation Partner via the Contact DASA Form on our website.

Q: Will a recording of the webinar be available?

A: Yes. A recording has been uploaded to the website here and slides from the event have been sent to all registered attendees.

Q: Does the Defence Innovation Loan need to be matched by a UK partner? Are there awards?

A: No match funding is required. Loans can provide up to 100% of eligible project costs for R&D projects. The Defence Innovation Loan is not classified as an award.