Information for UK SMEs who want to apply for an innovation loan, including finding a suitable competition, the application process and loan agreement.
Innovate UK is running a pilot programme of flexible, patient innovation loans, which will be delivered through Innovate UK Loans Ltd, a wholly-owned subsidiary. Innovate UK is working to broaden the range of innovation finance support available to businesses, so they can access funding at all stages of innovation.
In total, there will be £50 million in innovation loans made available through 5 loan competitions to 2019. You can only obtain an innovation loan by applying into Innovate UK’s competitive loans process.
If you would like to apply for an innovation loan, this guidance will help you to find a relevant opportunity and complete an application. It includes information on what happens after you have submitted an application and if you are successful.
You should follow this guidance in conjunction with the specific competition guidance for the opportunity you intend to apply into. Before making an application you should take independent advice.
If this is the first time you are learning about innovation loans you should go back and read our overview guidance. This explains what an innovation loan is, how the programme works and what you can use an innovation loan for.
Understanding if your project is eligible for an innovation loan
Innovation loans are for late-stage research and development (R&D) projects categorised as experimental development only. You cannot get an innovation loan for general business purposes.
Experimental development projects are those that involve systematic work to draw on existing knowledge from research or practical experience. This is done with the aim of producing new products, process or services, or making substantially improvements to existing ones, and introducing these to market.
Activities eligible under this category may include producing plans, arrangements and designs for your innovation or developing commercially-usable prototypes and pilots if it would be too expensive to develop these for demonstration purposes only.
It also includes experimental production and testing of products, processes and services.
Innovation loans are not for earlier stages of research and development, such as activities covered under the categories of fundamental research, industrial research, or feasibility studies. If your project is at an earlier stage, you may consider applying for alternative funding, such as an innovation grant.
More details on project eligibility, including any specifics relating to the scope, can be found in the brief of the loan competition you wish to apply into.
Understanding if your business is eligible for an innovation loan
Only single UK-based SMEs may apply for an innovation loan.
By UK-based, we mean that your business must be registered in the UK and that you carry out the bulk of your work here.
By single, we mean that only one business can apply per application. Collaboration with other individuals or organisations cannot be funded through an innovation loan. You may subcontract work to an individual or organisation as part of the project if you can justify why doing so is critical to the delivery of the project.
We follow the European Commission definition of SMEs, which applies criteria of staff headcount and either turnover or balance sheet total. If your business does not fall in the definitions given here then you will not be eligible to apply.
You can apply for an innovation loan if you have an existing grant or grants from Innovate UK, so long as you are not applying for the same innovation project and we consider that you have made substantial effort to exploit these previous grants.
Understanding what you can borrow
You could get an innovation loan for up to 100% of your eligible project costs.
The minimum and maximum amount of loan available to you will be specified in the specific competition you are applying into.
Money borrowed may be spent on the project only, for example, for the purchase of equipment that will be used solely in the innovation project for which you have received a loan. If you intend to also use this equipment in other work, the amount of the loan you can borrow towards the equipment will reflect this.
You will need to fund any project costs that are not considered eligible by Innovate UK. You will also need to cover other day-to-day activities that are not part of the project.
Please note, innovation loans are a form of state aid. This is because they have favourable terms, such as the discounted rate of interest, which over the life of the loan will be equivalent to a grant. To comply with state aid rules, the level of this ‘grant equivalent’ for experimental development R&D activities must be below 35% of the eligible project costs if you are a medium-sized enterprise, or below 45% if you are a micro or small enterprise
Understanding the project and loan periods
The total period for an innovation loan is up to 10 years. Your project may last up to 5 years, with a further 5 years available for repayment. This is broken down as:
- up to 3 years where you can draw down money every 3 months to carry out your research and development, known as the availability period. You will not need to make repayments during this period, but you will need to pay interest every 3 months. Interest is due only on the actual amount you have borrowed, not on the total amount committed in the loan
- up to a further 2 years to focus on the route to market and commercialisation of your innovation, known as the extension period. You won’t be able to make any more drawdowns, and you also won’t need to start repayments during this period. You will need to pay interest on the money you have borrowed
- up to 5 years to repay your loan, known as the repayment period. You will need to make payments on the total amount plus interest every 3 months
You will need to propose the most suitable timings for your project and business. These timings are the longest periods we will consider.
Finding an innovation loan competition
Loan competitions will be run through our Innovation Funding Service. To find a current loan competition, search for ‘loan’ in the Innovation Funding Service’s keywords search bar.
Grant funding competitions are also searchable on the Innovation Funding Service. When you click on a competition in the summary check ‘funding type’. It will be called ‘loan’ if it is a loan competition.
Loan competitions may be open to any type of experimental development project, or they may be themed. In a themed loan competition, your innovation project will need to fit the specific scope criteria outlined in that competition brief. If your innovation project does not meet these criteria then you will not be eligible to apply for this specific opportunity.
There will be 5 loan competitions during the Innovate UK pilot, to be run over 2 years to 2019. They will be held on various dates throughout the year. Once a loan competition has closed you will no longer be able to apply into it. Only one application is permitted from a business per loan competition.
Registering for an innovation loan competition
Before you can apply into a loan competition you will need to register on our secure application submission system. Here you will find all of the documents you need to complete your application. You will also be required to upload and submit your application and appendices through here. We will only accept applications through this system.
The specific loan competition guidance will contain detailed information on how to register and submit your application.
You can only register once a loan competition has opened.
Please note, registration will close at midday one week before the application deadline. You will not be able to register after this time.
Applying for an innovation loan
To apply for an innovation loan you will need to complete the 2-part application that you will find on the application submission system.
Part A of the application will be used to assess how innovative the project is. Part B will be used to consider the whole business and how suitable that business is for an innovation loan.
Please note, the full scope and competition guidance will be provided for the specific opportunity you are applying into. It is vital that you read this in conjunction with this general guidance for applicants before starting your application.
In your Part A application, you will be expected to answer questions on the details of your proposed project.
It will be split into 3 sections:
- project details
- innovation questions
- project finances
In the section for innovation questions, there will be a maximum of 10 scored questions, which will be outlined in the specific competition guidance. You will be told of the points available for each question in the specific competition guidance.
You will need to answer all mandatory scored and unscored sections in order for us to assess the quality. The specific loan competition guidance will elaborate on the type of information we are seeking under each section.
We look for project proposals that:
- are highly innovative
- have strong market potential
- show solid delivery capability
- have a clear route to commercial success
- represent value for money for the business and the taxpayer
In your Part B application, you will be expected to answer questions about your business and its ability to pay interest and repay a loan.
Within your Part B application you will need to outline the preferred loan conditions and the reasons as to why.
It will be split into 2 sections:
- business questions
- business financial information
We look for applications that show:
- an appropriate borrowing proposal from a suitable business
- a clear route to commercial success
- a strong management team
- why you need public funding in order to be able to carry out your project
- why you are unable to fund the project from your own resources or other forms of private-sector funding such as equity investment, commercial lending or lending supported by the British Business Bank and other similar agencies
You will need to answer all mandatory scored and unscored sections in order for us to assess the quality and suitability of your application. The specific loan competition guidance will elaborate on the type of information we are seeking under each section.
Submitting an application for an innovation loan
A person with authority to act on behalf of the company must submit the application.
You will need to submit your application through the secure application submission system where you registered for the loan competition by the competition deadline. We will only accept applications submitted through this system.
The specific loan competition guidance will contain detailed information on how to register and submit your application.
If you have any difficulties in submitting your application, call customer support services on 0300 321 4357 or email email@example.com.
Please note, by submitting an application, you are providing authority for Innovate UK, or any subsidiary or agent acting on our behalf, to undertake 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.
To find out how we handle your personal information please see Innovate UK’s personal information charter.
Documents must be in the format provided and named as instructed in the specific loan competition guidance. You must submit:
- your completed part A application form with your unique application number
- your completed part B application form with your unique application number
- the project finance form for your innovation project
- your business financials spreadsheet
- any appendices as allowed by the specific competition guidance
If any document is incomplete, missing or is submitted in the incorrect format it will result in the entire application being deemed ineligible and not being sent for assessment.
You must submit both parts of the application by the stated deadline in order to be eligible.
In order to be considered for an innovation loan, we require you to confirm that you agree to the innovation loans declaration.
This declaration recognises that entering into a loan agreement with us is a significant financial commitment. It requires you to confirm that:
- the loan is for business purposes, is the right approach to financing your business, and that you have authority to make this assessment
- you consent to any necessary and relevant financial checks, including checks on key persons in the business
- you understand that any information provided in the application that is proven to be false or misleading may lead to a breach of the loan agreement
- you understand that an innovation loan agreement is not a regulated agreement under the Financial Services and Markets Act 2000 or the Consumer Credit Act 1974 and is not subject to the same benefits or protections
- you understand that it is a legally binding obligation and that you should seek independent advice
You will be required to tick a box to confirm that you have read and understood the declaration. If you do not tick the box your application will be rejected.
If you are successful in your application you will also need to sign this declaration before you enter into a loan agreement with Innovate UK Loans Ltd.
You should consider taking independent advice on the content of this declaration.
Summary heads of terms
By submitting an application you will confirm that you have read and agree to the innovation loans summary heads of terms.
The summary heads of terms describe the main terms that apply to an innovation loan agreement with Innovate UK Loans Ltd. They provide an outline that reflects the typical nature of the loan agreement that Innovate UK Loans Ltd would consider making available.
The summary heads of terms for innovation loans:
- act as written confirmation of the main terms of the innovation loan
- outline the parties involved and their obligations relating to the innovation loan
These terms are subject to detailed due diligence.
Please note, the summary heads of terms are indicative and not exhaustive. If required, they may be amended or withdrawn at any time. You should read the heads of terms carefully and take the time to understand them, including seeking independent advice.
How your application is assessed
Once the deadline for the loan competition has passed your application will be sent for assessment in Innovate UK’s competitive assessment process.
Assessing the quality of your project
If in scope, Part A of your application will be sent to up to 5 independent assessors who are experts in innovation in the field of your project.
The assessors will review Part A of your application against scoring matrices. Only projects that meet the quality threshold in Part A will go through to the next stage to be considered for credit evaluation.
Assessing the suitability of your business to receive a loan
If successful, both Part A and Part B of your application will be sent to Innovate UK Loans Ltd’s credit team for consideration.
The credit team will consider if your application is:
- affordable to your business
- appropriate for debt finance
- supported by a management team with sufficient technical, financial and commercial expertise
- in need of financial support from the public sector
You may be contacted during this time if further information is required, including any additional information required to complete a full credit assessment and specific consents for credit reference checks. Full instructions will be provided.
Presentation to the credit committee
If your application is deemed to pass both Part A and Part B you will be invited to present to Innovate UK Loans Ltd’s credit committee.
You will be contacted at the email address provided in your application to confirm a date, location and who should attend. We expect that this presentation will take place at your business location.
The credit committee will determine whether to offer an innovation loan after your presentation. The final terms of any loan offer will be decided by the Innovate UK Loans Ltd credit committee. These may not be the same as the terms proposed in your application.
Please note, applications are assessed on individual merit, however, to ensure a spread of projects we may choose to apply a portfolio approach to the assessment. All applications that meet the innovation quality threshold and credit evaluation will be considered to build a portfolio that:
- has high-quality projects
- spans a range of businesses that are of suitable credit quality
- spans a range of strategic themes, as described in the scope of the loan competition
- represents a potential return on investment both for the business and the UK
How you are notified
Successful and unsuccessful applicants will be contacted by the date stated in the loan competition brief and informed of the outcome of their application. We will email you on the address provided in the application form.
We will give feedback approximately 4 weeks after you have been notified of the decision. You will need to sign into the secure website where you uploaded your application documents to access this.
If you are successful
In order for us to offer you an innovation loan you will need to return all specified information and satisfactorily pass all checks. Your project cannot progress without this information.
We will carry out a series of checks, such as checks to verify the identity of your business through the ‘know your customer’ process. These will include:
- anti-money laundering checks on the identity of the people in the company identified as key stakeholder and beneficial owners
- commercial due diligence on the information in your business plan
- enhanced due diligence for businesses of increased risk, such as those with politically exposed persons
During the project setup we will also finalise the loan agreement. This includes setting the project baselines for cost, schedule and scope and any specific conditions to be set out in the loan agreement, including corporate authorisations. This may not be the same as that set out in your application.
Security taken by Innovate UK
In entering into a loan agreement you grant permission for Innovate UK to take security during the lifetime of the loan agreement.
Security might include:
- a general corporate debenture
- charges over a specific asset or assets that have been purchased with the loan
- charges over intellectual property developed with proceeds of the loan
Specific terms will be set out as part of the loan agreement. Further legal agreements may be needed to cover these forms of security.
We will not require you to provide personal guarantees.
You should take independent advice.
If you are not successful
You will be notified of your application being declined on the application submission system with feedback as to why. No additional feedback can be provided. You cannot appeal this decision.
If this is your first application for an innovation loan for this project you may use the same application to apply in one more loan competition.
Carrying out your project
Drawing down your loan
During the availability period you will be able to draw down money from your loan facility every 3 months in order to deliver your project.
The amount you draw down will be based on your forecast expenditure on eligible project costs for that 3-month period. Costs are only eligible if they are incurred and paid between the project start and end dates.
You will need to complete Innovate UK Loans Ltd’s standard request template in order to request to draw down the money. Your draw down request will only be granted if it meets our project progress conditions and financial and reporting conditions.
We may stop draw downs at any time if:
- a project is not performing as expected or appears to be going significantly off target
- the financial health of the business has significantly deteriorated
- the business is not meeting its obligations of the loan agreement (for example, by providing financial information when required)
Under all circumstances we would discuss this in detail with you first.
Monitoring and reporting on your project
You will be assigned a monitoring officer for the duration of your project. They will help to make sure your project complies with our terms and conditions. They are not responsible for overall project management.
The monitoring officer will meet with you every 3 months to ensure your project is on track.
We will also need to receive financial updates from you in the form of credit reviews every 3 months through our credit team. This is in addition to you providing an annual credit review.
Paying interest on your loan
You will be required to pay interest every 3 months from the date that your project starts, including during the availability period and extension period.
Interest is payable only on the amount of money you have borrowed at the time the interest is due, not the total amount of money you intend to borrow. For example, if you draw down £1,000 in the first 3 months from a total loan amount of £100,000, you will need to pay interest on the £1,000 only.
The rate of interest will be set at the HM Treasury discount rate for financial transactions set out in its Public Expenditure Statistical Analyses at the date that the competition is launched. You will be notified of this rate in the specific loan competition you are applying into and it will be set out in your loan agreement.
The rate of interest is fixed, but is subject to any restructuring or extension of the loan agreement.
Payments should be made by direct debit to Innovate UK Loans Ltd via the loan administrator.
Paying back your innovation loan
You will need to repay your loan during the repayment period. We expect that this will be when you are exploiting the results of your project commercially through selling your product or service.
You will need to repay the balance of the full amount that you have borrowed, with interest, every 3 months, spread over the repayment period. The amount you will pay back will be as agreed as part of your loan agreement.
Payments must be made via direct debit to Innovate UK Loan Ltd via the loans administrator.
The loans administrator will send you a notification on the status of your repayments every 3 months, which will include the outstanding amount of payment due. You will also receive a yearly overview of your progress.
When the total amount borrowed is paid off, you will receive written notification from the loan administrator.
During this period you will continue to provide financial information on your business every 3 months, plus an annual credit review, to our credit team to ensure that the conditions in the loan agreement are met.
If you want to repay the loan early, you will be able to do so without penalty. Speak to our credit team.
If you encounter problems with paying back your innovation loan
If you encounter any issues relating to paying back your innovation loan or expect to do so under the agreed terms you will need to discuss this with our credit team immediately. We will work with you to agree on a way forward.
If you default on your loan
Events of default on an innovation loan may include:
- missed payment, if not rectified within the time periods set out in the loan agreement
- failure to comply with obligations set out under the loan agreement
- change of control of the business, without our prior written consent
- the departure of a key person from the business or project, without our prior written consent
- cross-default, if you default on another loan agreement
- if it becomes unlawful to comply with obligations set out under the loan agreement
If you encounter any issues relating to your innovation loan or expect to do so under the agreed terms you will need to discuss this with our credit team immediately. We will work with you to agree on a way forward.
In the case of default, we will work through our loan administration service provider to recover any amounts due. This may include enforcing security over assets, such as intellectual property or other assets purchased, that you have pledged to us under the loan agreement.
We may engage a collection agency to act on our behalf to recover costs. In terms of where we rank against other creditors in the debt waterfall, we expect to rank ahead of junior lenders such as loans from company shareholders or directors, unsecured trade creditors and shareholders. We would expect to rank behind preferred creditors and commercial senior secured lenders.
If you still have questions about innovation loans
If you have any questions relating to innovation loans you should speak to Innovate UK’s customer support service, who will be able to help you with your enquiry. Call 0300 321 4357 or email firstname.lastname@example.org.
You should also take independent advice.