An overview of Innovate UK’s innovation loans.
Innovation loans pilot
Innovate UK’s pilot programme of innovation loans started in 2017 and, through 7 competitions, has now committed £80m to over 100 successful applicants.
Further competitions will be delivered as a further extension to the innovation loans pilot programme during 2021. The delivery of a long-term programme will depend on the allocation of funding in a future government spending review.
As part of our coronavirus response package that included changes to timing of projects, continuity grants, additional business advice, a ‘fast-start’ competition and the Sustainable Innovation fund, Innovate UK has approved approximately £77 million in innovation continuity loans to nearly 100 small and medium enterprises (SMEs) and third sector organisations that had a challenge in continuing innovation activity as a result of the COVID-19 pandemic.
Who can apply?
The specific eligibility criteria for each innovation loans competition will be set out in the competition brief on the Innovation Funding Service. You must match all of the criteria to be eligible.
Innovation loans are for micro, small and medium-sized businesses and can be used to fund the costs of a research & development project only. Only single businesses can receive an innovation loan. Innovate UK will make a lending decision based on the quality of the project as well as on the suitability of the applicant for a loan.
The dates for innovation loans competitions, including dates of opening and closing and the expected dates of first loan drawdowns and project start will be set out in the competition brief for each competition on the Innovation Funding Service.
What funding is available and what can you use the innovation loan for
The amount of funding available in each innovation loan competition or in a series of competitions will be set out in the competition brief. The minimum and maximum loan size will also be described in the competition brief. In our most recent competitions, we have offered loans of between £250,000 and £1,600,000. The total loan amount cannot exceed 100% of the eligible project costs of your project.
If we make you a loan offer, it will be based on your project and our judgement of the suitability and affordability of a loan for your business.
Interest and repayment terms
Innovation loans will have interest payable throughout on amounts that you borrow. In our most recent competitions, we have charged interest at 7.4% per annum.
During the availability and extension periods (described below) interest of 3.7% has been payable on amounts borrowed and additional interest at 3.7% per annum has been accrued and deferred until the repayment period.
During the repayment period, interest has been payable at 7.4% per annum on anything you have borrowed, including interest accrued and deferred from the availability and extension periods. Innovation loans will have a maximum term set out in the competition brief. In our most recent competitions, the maximum term has been 7 years.
Within this maximum term, the loan will have three periods:
- An ‘availability period’, with a maximum length set out in the competition brief, where you can draw down money every 3 months to carry out your research and development, known as the availability period. The duration of this period will be set out in the competition brief. You will not need to make repayments during this period, but you will need to pay interest every 3 months on the amount you have borrowed. The rate of interest and how this is paid will be set out in the competition brief. Interest is calculated only on the actual amount you have borrowed, not on the total amount committed in the loan.
- An ‘extension period’ after the end of the availability period, with a maximum length set out in the competition brief, to focus on the route to market and the commercialisation of your innovation. 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 during this period. The rate of interest and how this is paid will be set out in the competition brief.
- A ‘repayment period’, with a maximum length set out in the competition brief, 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 also have to pay interest every 3 months on the amount outstanding. The rate of interest and how this is paid will be set out in the competition brief.
These are the longest periods we will consider and, since the overall term of the loan may be shorter than the individual maximum availability, extension and repayment periods, your application should propose how long the availability, extension and repayment periods should be within this maximum term.
These should be based on the needs of your business. We will consider the suitability of your proposed timings in any loan offer that we make to you.
We will not charge any arrangement, set up or monitoring fees.
How will we decide whether to offer an innovation continuity loan?
The aim of this funding is to support significant, sustainable business growth which results in considerable economic impact.
We are looking for businesses who can demonstrate that their innovation activities have the best potential to deliver future growth. Your application will be evaluated on:
- our assessment of the quality of your project proposal and
- our judgement on the suitability of your business to receive a loan.
We look for applications that show:
- an appropriate and evidenced loan request
- a clear route to commercial success with clear, considerable potential to make a significant and positive impact on the UK economy and/or productivity
- realistic, significant potential for global markets
- a strong management team
- a strong rationale for your innovation activity
- why you are unable to fund the project from your own resources or other forms of public or private-sector funding.
We are not funding:
- a consortium as a whole
- sole traders
- large companies
- research organisations
We will evaluate the suitability of your business to receive a loan. This will be carried out by our credit team, based on your answers to the questions in your application and your historic and forecast financial statements.
How to apply
To apply for an innovation loan, please go to the Innovation Funding Service to find an available innovation loans competition.
There are three parts to applications:
- Quality of the project: this will be evaluated by independent experts based on the quality of your project proposal in your application.
- Project Finances: we will check the eligibility of the costs of your proposed innovation project
- Suitability of the organisation to receive a loan: this will be evaluated by our credit team based on your answers to questions on your business, the Early Metrics start-up high growth index and your historic and forecast financial statements.
What to expect
In the application on the Innovation Funding Service, you will be expected to answer questions about your proposed project and your business as well as providing financial information about your business.
The business information part of the application will include questions about your business and its ability to pay interest and repay a loan.
Within your answers to the business questions, you will need to outline your preferred loan conditions and explain why you need an innovation loan for the amount and time requested.
The business information questions include a mixture of:
- requests for specific information (for example on monthly revenues or number of employees)
- selection of category responses (for example on the stage of development of your product or service)
- self-assessment scoring (for example on the level of important challenges to your growth)
- text (for example to allow you to provide a description of your business model.)
The business financial information part of your application will be in the form of a spreadsheet template including profit and loss, balance sheet and cashflow information. This template includes a repayment calculator and a sheet to capture simplified sales, cost of sales and gross profit margins. In this spreadsheet you will need to provide:
- up to three years of historic actual profit and loss and balance sheet information (if available)
- forecast profit and loss, balance sheet and cashflow information to cover the full period of your innovation loan request.
The project part of the application will include questions about:
- the motivation for your project
- the market opportunity
- project delivery
- project risks and
- project costs and value for money.
You will need to answer all mandatory questions so that we can assess the quality and suitability of your application.
An innovation loan may be offered where you can demonstrate that your business is suitable and eligible. You will need to show that your business can afford the interest and repayments on the loan and that it cannot obtain finance from other sources such as banks and equity investors for your project.
You must be able to show that your business:
- can cover interest payments
- will be able to repay the loan on time
- needs public funding.
The Innovate UK Loans Ltd credit committee will decide whether to make a loan offer and its final terms.
An application for an innovation loan needs different information from one for a grant and will require more detailed financial information than needed during the setup phase of a project.
What conditions will apply?
We expect to take security, in the form of a mortgage debenture. We will not require personal guarantees. Where a business has senior secured commercial debt in place, or takes on such debt, we will be prepared to cede priority. This will not apply to shareholder or director loans or convertible debt.
In addition to your obligation to work with a monitoring officer for your project activity, you will also have to commit to financial and information covenants throughout the period of your loan.
The financial covenants will cover:
- liquidity: you will have to show that you have a sufficient liquidity, with a ratio of current assets to current liabilities of at least 1.1x at the point of each drawdown and each quarter throughout the period of the loan
- debt service cover: you will have to show that you have a sufficient operating profit, with a ratio of earnings before interest, tax, depreciation and amortisation (EBITDA) to interest and principal repayments of at least 1.2x, in the repayment period.
The information covenants will cover:
- project monitoring: you will have to complete quarterly project monitoring satisfactorily
- financial information: you will have to submit management accounts quarterly and annual accounts within 6 months of the end of your financial year.
Your loan agreement will also include additional control provisions including:
- we will have to give consent for (and right to seek repayment in the event of) a change of control of your business
- we will have the right to determine if your project has failed and the right to accelerate to repayment
- we will have the right to convert your loan and accrued interest to equity if, for example, at the end of the extension period commercialisation has not been achieved, but appears probable within a reasonable period, or if it appears likely that you will not be able to repay your loan as required. This will be after consultation with you and on terms that we determine, acting reasonably
- we will have the right to seek early repayment through refinancing or as part of any liquidity event achieved by your business once the financial market disruptions caused by the COVID-19 crisis is deemed to have recovered
- we will have the right to take control of any unexploited intellectual property not foregone in a crystallisation event and distribute to the benefit of the UK innovation community.
More details of our approach, including a summary ‘heads of terms’ document setting out the main terms and conditions of the loans, are available in the Innovation Loans Terms and Conditions:
Subsidy Control and State aid
Innovation loans are a form of UK Subsidy and may be a form of State aid.
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 and will be a form of subsidy. 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.
It is your responsibility to make sure that your organisation is eligible to receive subsidy and, if relevant, state aid. We strongly recommend that you seek independent legal advice before applying into, and accepting the terms of, this funding award.
How will the loan be monitored?
We will rely on monitoring reports for your innovation project to ensure satisfactory progress. In addition, businesses will be required to provide quarterly management accounts. A member of our monitoring team will discuss any issues relating to the standing of the underlying business.
The role of the monitoring officer will include the extension period.
What happens if the business defaults on its loan?
In the event a payment is missed or a covenant is breached, a business has a maximum of 90 days to cure the issue. In the event that the issue is not resolved within this period, assuming that no other agreement has been reached, a formal demand will be issued.
No drawdowns will be made while the business is in default, except by exception and with the consent of Innovate UK Loans Ltd, the lender.
We will include in the loan agreement provisions that will allow us to seek to reach an agreement with you to convert the loan into equity in your business that, when sold, would provide an alternative repayment mechanism.
Before you start – important information
Entering into a loan agreement with us is a significant financial commitment. You 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, that your business is legally allowed to borrow and that you will be able to fulfil the repayment obligations under the loan.
Information provided by you in the application will form part of the loan agreement. Information later proven to be false or misleading may lead to a breach of the loan agreement which could result in the immediate withdrawal of the loan, a demand for immediate repayment and the enforcement of any security granted in connection with the loan agreement.
Execution of the loan agreement and all associated documents must be by an authorised signatory of the company and evidence of such authorisation must be provided in the form of a board resolution.
Upon entry into a loan agreement with us you will incur binding legal obligations and you should seek independent legal advice.
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.
The principles that Innovate UK follows when we collect, hold or use your personal information and how you can check what details we hold are set out in Innovate UK’s personal information charter.
We recommend that you should take expert financial advice in deciding whether to apply for an Innovation Loan and in preparing your financial submission.
If you need more information about how to apply for an Innovation Loan, email email@example.com or call 0300 321 4357.
Innovate UK EDGE is a key part of the UK innovation agency’s investment in the innovative businesses that drive economic growth. It complements Innovate UK project funding with intensive, specialist-led support for such ambitious businesses.
Each high-potential, innovative business in our portfolio benefits from the objective perspective of a dedicated innovation and growth specialist local to them. Our specialist considers a business in the round and, working closely with its leadership, identifies the most productive ways to accelerate its growth.
Innovate UK EDGE brings a range of services to help ambitious, innovative SMEs scale and grow. We help businesses:
- exploit innovation, intellectual property, and connections in the UK and abroad
- enter new markets at home and abroad
- access funding and finance and getting investment ready.
We recommend that you should take expert financial advice in deciding whether to apply for an Innovation Continuity Loan and in preparing your financial submission.