How does innovation (loan) funding work – 5 facts you should know

Funder, Funding, Innovate UK, IUK Innovation Loan

Last year, Innovate UK (the UKs leading innovation funding agency) awarded over £50million in low interest (3.7%) loan funding to businesses across a range of sectors including Cleantech, Edtech and more.

There are multiple options for funding innovative ventures. Identifying the best option (or combination of options) is a time-consuming challenge for your already busy entrepreneurial team.

This short article will help you understand how an Innovation Loan works and whether it is the right option to fund your venture. We will cover the following points:

  • How does innovation loan funding work and how much money can I realistically get?
  • What are the key success criteria needed to secure innovation loan funding?
  • What is the chance of securing innovation loan funding for my venture?

What is Innovation Loan Funding?

An innovation loan typically has the following characteristics:

  • Awarded by a government body to businesses that are undertaking a novel, high-risk research & development project (R&D Funding).
  • Low interest loan (3-5%) with a generous repayment period that would consist of a 2-4 year repayment holiday, followed by full repayment over the following 1-3 year period.
  • Applicants can apply for a range of funding between £100k and £1m depending on the length and complexity of the innovation project. There will be specific deadlines published by the funder, followed by an 8-10 week review process before a decision to award the loan is provided to the applicant.
  • The delivery of the innovation project will be monitored by an assigned officer working with the applicant company to make sure the project runs smoothly.
  • Wider support will be given to the applicant to assist in preparing the ground for commercialisation.

5 Facts about Innovation Loan Funding you should know before applying

  1. Timing – This Innovation Loan funding process is time-consuming from the perspective of a business operating in a dynamic commercial setting. Understand that the application will take 6-8 weeks to prepare properly and the decision time frame is typically 8-10 weeks.
  2. Innovation – The first hurdle is the assessment of the innovation of the applicant. Loan assessment will not begin unless novelty and capability is demonstrated, so get this bit right or the rest of the effort will have been wasted.
  3. Financial Forecasts – Get them prepared by an experienced FD who can generate 5-year forecasts with financial ratios appropriate to a commercial loan. Consider Assets vs. Long-Term Liabilities and make sure this ratio is favourable from the perspective of a lender.
  4. Scenario Modelling – Consider and model what would happen if sales were delayed, Quick Ratio lapses or key customers fall away. Demonstrate contingency plans and risk management to cope with adverse commercial scenarios.
  5. Up-side – This type of loan has huge benefits: no Personal Guarantee, payment holiday, early drawdown, low-interest rates and a significant cash injection. Get the application right, treat the Due Diligence process with respect and secure the funding.

What are my chances of securing Innovation Loan Funding?

In our experience the funders are seeking applications from:

  • Established businesses (2+ years) that are either revenue generating or funded (equity)
  • Businesses that could cover the loan repayments even if the R&D project was not successful (low risk of business failure)
  • Businesses that have a strong team with a proven track record and a chairperson on the board that is going to ask the tough questions
  • Entrepreneurs and innovators that are breaking new ground to disrupt a market or address a market need
  • Businesses that are operating in sectors prioritised by the national government or European Union

In summary

Innovation Loans are in their infancy, but indications are that they are here to stay. You can expect to see more loans launched through the next EU Framework programme (post-horizon 2020) and more from Innovate UK in the future.

We’d love to help

We have experience of developing bids and securing funding from Innovation Loans. If you would like our opinion on your venture’s chance of success, please complete our information request form here and we will be in touch to discuss.

More to explore

Below, you’ll find links to related external content that expand on the topics discussed in the article above. Please note that these links are provided for additional information and we are not responsible for the content on external sites.

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