Clearly the innovation loan programme has been a success – for both the funder and the applicants.
Innovate UK Innovation Loans are in round 15 (closing May 2024) with round 16 already planned for later in 2024.
But what is an innovation loan? What do a CEO and FD need to understand about Innovate UK Innovation Loans before applying? We’ve answered 7 of the most common questions to help you navigate your Innovation Loan application.
How much money can we borrow through Innovate UK Innovation Loan?
Applicants can apply for up to £2m in loan funding through the Innovate UK Innovation Loans fund. The minimum amount an applicant can borrow is £100,000. Innovation Loan funding will cover the following costs:
- Staff salaries, social security contributions, and on-costs
- Materials costs including software subscriptions, cloud computing and licenses
- Capital costs such as machinery, components and IT equipment
- Subcontractors such as legal advisors, technical advisors, designers, engineers, etc.
- Travel costs for the project
- Other costs such as IP advice, market research and training.
Crucially, funding from Innovate UK Innovation Loan must be spent on research and development and scaling activities. Marketing, sales and operations costs are not eligible under Innovation Loans.
What security does Innovate UK look for as part of an Innovation Loan?
The purpose of the Innovation Loan is to “support the development of innovative new products, processes or services that are significantly ahead of others currently available, or propose an innovative use of existing products, processes or services. It can also involve a new or innovative business model.” The loan fund is setup for SMEs underaking high-risk R&D projects who cannot secure loan or equity funding at the required level through traditional sources.
Therefore, Innovate UK Innovation Loans do not require personal guarantees or assets to secure loans against. They are designed to overcome exactly this barrier.
From Innovate UK:
“Although there are no personal guarantees and the loan is not dependent on asset values, there is an overall debenture so the loan is a senior secured debt obligation.”
What is the structure of an Innovation Loan from Innovate UK?
The innovation loan is split into 3 specific phases as follows:
- Project Phase: 12 – 36 months of the R&D project where successful applicants can draw down loan funding as required to cashflow their R&D costs.
- Extension Period: 12 – 24 months of the loan period where the applicant has a ‘holiday period’ during which time, no repayments need to be made. Interest is accrued.
- Repayment Period: 12 – 60 months to repay the loan in full + interest.
So, a typical Innovate UK Innovation Loan could run over 60 months, with 18 months of drawdown and R&D work, 18 month holiday period and 24 month repayment period.
What interest rate is offered by Innovate UK Innovation Loans?
The exact interest rate will vary depending on the specific competition, company financials and external economic conditions. Typical rates are between 3.7% and 7.4% – well below normal commercial lending rates.
From Innovate UK:
“(at the time of writing) The interest rate is fixed at 7.4% although during the availability (R&D) period and the extension (pre-commercial) period only half is payable (3.7%) and half is deferred until the repayment period.”
Who can apply for Innovate UK Innovation Loans and what is the application process?
Innovation Loans from Innovate UK are available for micro, small and medium sized businesses (SMEs). In the words of Innovate UK:
“Innovate UK innovation loans are for highly innovative late stage research and development (R&D) projects with the best potential for the future. There must be a clear route to commercialisation and economic impact.”
The application process is split into two stages:
- Application Phase: Applicants must submit: 1) Financial Plan, 2) R&D Plan, 3) Business Plan. These must be submitted by answering specific questions from the funder on their online portal and provided templates.
- Due Diligence Phase: If successful at the Application Phase, applicants must participate in a due diligence process run by the Innovate UK Innovation Loans team. Financial plans, drawdown, repayment capability, financial ratios, etc will be assessed.
What do we need to demonstrate to win an Innovation Loan?
Your proposal must demonstrate:
- a clearly expressed and compelling innovative idea
- a robust and deliverable business plan that addresses and shows evidence of market potential and needs
- a team with the necessary skills and experience to run and complete the project successfully and on time, and take the outputs forward
- awareness of all the main risks the project and business will face, with realistic plans to manage, mitigate and minimise the impact of each of these
- sound, practical financial plans and timelines that represent good value for money and ability to repay the loan
- why you are unable to fund the project from your own resources or other forms of public or private sector funding
- 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
What does an R&D Project look like in an Innovate UK Innovation Loan?
Your project can include:
- prototyping
- demonstrating
- piloting
- testing
- validation
Innovate UK Innovation Loans are aimed at “late-stage R&D Projects” meaning that the proof-of-concept has been established, MVP is in the market and ideally generating revenues. In terms of Technology Readiness Level (TRL), Innovate UK Innovation Loans are targeted at TRL6-9.
Where can I get help with Innovate UK Innovation Loans?
Venturenomix offers an end-to-end service for businesses looking to apply for and manage an Innovation UK Innovation Loan. We can:
- Help you understand you chance of success
- Develop the full application including all required templates
- Support through the DD process
- Project Manage the Innovation Loan project
From Innovate UK:
“While we definitely encourage applicants to take expert advice (notably financial advice) and would not dissuade anyone from working with you or other experts, we do provide lots of guidance, webinars and deep dives to help applicants to understand the loan.”
The Innovation Loan team at Innovate UK are contactable through the specific call specification.
We’d love to help
Please get in touch if you would like to discuss this in more detail.
