An overview of Innovate UK’s loan programme for SMEs involved in late-stage innovation projects.
What are innovation loans?
Innovation loans are a financial product offered by Innovate UK. They are for UK businesses that want to scale up and grow through innovation, developing new or improved products, processes or services.
Through innovation loans, Innovate UK aims to give businesses support to gain the competitive edge and also grow the UK economy.
Loans may be offered where a business can demonstrate they are suitable and eligible.
They are for late-stage research and development (R&D) projects only. A late-stage R&D project is one which builds on a new idea but has not yet reached the point of commercialisation.
It may include activities such as prototyping, demonstrating, piloting, testing and validation in environments that are representative of real-life operating conditions.
Innovation loans are aimed at UK-based small or medium-sized enterprises (SMEs) that can show that they can afford the interest and repayments on the loan and that they cannot obtain finance from other sources such as banks and equity investors.
Innovate UK is running a pilot programme of loan competitions over 2 years to the end of 2019. A total of up to £50 million is available for business innovation projects.
Interest will be set for the term of all loans at the opening of each loan competition, using the discount rate for financial transactions set by HM Treasury in Public Expenditure Statistical Analyses. Currently, this is 3.7% per year.
Loans will be made by Innovate UK Loans Ltd, a wholly-owned subsidiary of Innovate UK.
Please note, Innovate UK is not a financial adviser. Please seek independent advice if you are considering applying.
What you can use a loan for
You can use a loan to finance a late-stage research and development project categorised as experimental development.
Experimental development includes:
- producing plans, arrangements and designs for your products, processes or services
- developing commercially-usable prototypes and pilots
- experimental production and testing of products, processes and services
Experimental development does not include routine or periodic changes to products, production lines, manufacturing processes, existing services and other operations in progress, even if such changes may represent improvements.
How an innovation loan works
You will need to successfully apply into one of the Innovate UK loan competitions to obtain an innovation loan. It is a competitive process. You could borrow between £100,000 and £1 million, to cover up to 100% of your eligible project costs.
The loan period is up to 10 years. This breaks down as:
- an availability period of up to 3 years. This is the period when you are drawing down money to carry out research and development. You will not need to pay back the money you borrow during this period, but you will need to pay interest on the money you borrow.
- an extension period of up to 2 years, if required. This period is to enable you to establish a clear route to market and commercialisation, with up to 2 years available before you need to start repayments. You will still need to pay interest
- a repayment period of up to 5 years. This is when you will need to repay your loan. Payments will be taken every 3 months. Interest will also be payable
You will need to propose the most suitable timings for your project and business in your application. These timings are the longest periods we will consider.
We expect to take security where it is available, for example over assets purchased and intellectual property developed with the proceeds of the loan. We will not require personal guarantees.
More details of our approach, including a summary ‘heads of terms’ document setting out the main terms and conditions of the loans, are included in the guidance for applicants for each loan competition.
Innovation loans and state aid
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 be compliant 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
- below 45% if you are a micro or small enterprise
Who can apply
To be eligible for an innovation loan you must:
- be an SME
- be UK-based
- be planning a project that fits with the defined scope of the specific loan competition you are applying into
- apply alone. Only single SMEs may apply
Individuals, research organisations and large companies are not eligible. Collaboration with other organisations cannot be funded through a loan.
We follow the EU definition of an SME. Find out if you fit the criteria.
If you’re not sure if you’re eligible, speak to customer support services on 0300 321 4357 or firstname.lastname@example.org.
Opportunities to apply
There will be 5 opportunities for businesses to apply for an innovation loan. Up to £10 million will be available in each loan competition.
These pilot loan competitions may be:
- themed, where your application will need to fit with specific scope criteria
- open to any type of experimental development innovation project
Innovation loan competitions will be spaced out over 2 years and run to the end of 2019.
More details on the loan competitions will be made available here as these are confirmed.
To find out about the loan competition opportunities sign up to get website updates from Innovate UK.
How to apply
To obtain a loan you need to apply into Innovate UK’s competitive loans process. Only one application is permitted from a business per loan competition.
To apply you will need to complete a 2-part application and a legally-binding declaration. Only projects that meet the quality threshold in Part A will be considered for credit evaluation using Part B.
You will need to be successful in both parts to be offered an innovation loan. Final decisions on loan offers including terms will be made by the credit committee of Innovate UK Loans Ltd.
You should consider taking expert advice before submitting an application.
Part A: the quality of the project
In this section you will be assessed on the details and aims of your project.
You will need to answer questions on the project and provide evidence to show how it meets the scope, why it is innovative, how you will manage it and the anticipated project costs. You will also be asked on impacts your project is likely to have outside of your business, such as benefiting the UK economy.
This part of the application will be assessed by up to 5 independent assessors, appointed by Innovate UK.
Part B: the suitability of the business to receive a loan
In this section you will be assessed on your business and its ability to repay a loan. You will need to show that you:
- can cover interest payments
- will be able to repay the loan on time
- need public funding
- are unable to borrow all or some of the money from commercial lenders
You will need to answer questions on your business and provide evidence on:
- your preferred loan conditions, giving reasoning
- the business management team, their experience and structure
- ownership of the company
- your business model and how the project will impact it
- how the risks associated with the project may affect your business
- why you need public funding and are not able to access this from other sources
- business finances, including full financial accounts and cash flow
The declaration you will required to sign is in recognition that entering into a loan agreement with us is a financial commitment. You will need to confirm to us that:
- the loan is for business purposes
- you are wholly responsible for ensuring that it is the right approach to financing your business
- your business is legally allowed to borrow
- you will be able to fulfil the repayment obligations under the loan
You should consider taking independent advice on the content of this declaration.
Submitting your application
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.
At the end of the application process a person with authority to act on behalf of your company will be required to enter into the legally-binding declaration, required as part of your application. If you are successful you will be expected to sign this again in order to enter into a loan agreement with Innovate UK Loans Ltd.
If you receive an innovation loan
How drawdowns work
If your application is successful and we enter into a loan agreement with you, you will be able to draw down from your loan every 3 months during the availability period. The amount you draw down will be based on your forecast expenditure on eligible project costs for that quarter.
Your Innovate UK monitoring officer and the credit team of Innovate UK Loans Ltd will be responsible for signing off your drawdown requests. This will be based on financial health checks that we perform at each proposed drawdown. The monitoring officer will also help to oversee your project and ensure it is on track.
How interest payments work
Interest will be payable on amounts you have borrowed at the rate set out in your loan agreement at the end of each 3 month period.
The amount of interest will be calculated by a loan administration service provider appointed by Innovate UK Loans Ltd, who will inform you of the amount payable.
Interest will be payable during the availability, extension and repayment periods of the loan.
How repayment works
From the start of the repayment period, you will need to repay a proportion of the loan, with interest, every 3 months, until you have paid off the full balance. The amount you will pay back will be what was agreed as part of your loan agreement.
If you want to repay any of the loan early, you will be able to do so, without penalty.
If you run into any expected difficulties in making payments, you will need to discuss it with Innovate UK to agree a way forward.
If you miss a payment or breach any of the other terms of the loan agreement without our consent, 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.
Debt collection agencies may be appointed as necessary to act on our behalf.