What is an Innovation Loan, and why is it different to Grant Funding?

The Innovation Loan

For later-stage R&D, Innovate UK has another funding vehicle – the Innovation Loan. This is targeted at single applicant SMEs with proven prototypes that need financial support to make the final step into the market.

Unlike grant funding, these innovation loans must be repaid. Innovation Loans are charged at 7.4% interest, designed to be competitive with standard bank loans. Innovation Loans are structured in three periods – availability (the R&D project), extension (the time to first sale), and repayment (payback of the loan). The detailed criteria are specific to each loan competition. Typically, the availability period can be up to 3 years, the extension period up to 2 years, and the repayment period up to 5 years. During availability and extension periods interest is payable at 3.7% with a further 3.7% accrued and deferred to repayment. During the repayment period interest at 7.4% is applied.

Since opening in 2017 the Innovation Loan programme has funded £80m to over 100 projects over 7 competitions. Loans of between £250,000 and £1.6m have been offered.

What can be supported in an innovation loan?

As with grant funding, Innovation Loans are accessed through a competition-based process. They can have an open scope or relate to a particular theme. For example, the most recent rounds have focussed on Covid recovery. In terms of the types of activities supported Innovation Loans have the same rules as grant funding. Costs to deliver the defined project including labour, overhead, materials, capital usage, travel, and subcontract can all be covered.

An innovation loan is designed to support remaining R&D to get to market and not commercial work. Activities such as the scaling of manufacture processes and regulatory approvals are commonly funded. However, the loans are not there to fund production runs of products. Direct sales and marketing cost is also ineligible although you would expect to see a healthy amount of exploitation and business planning which can include activities such as drafting agreements, user trials, and stakeholder engagement.

What does the application look like?

Innovation Loan applications are more complex than standard grant applications. Alongside the standard technical questions, applicants must complete a business survey, and submit a financial spreadsheet detailing the payback terms. This helps assess the health and potential of the business as well as the proposed idea.

How are they assessed?

Eligibility checks and technical assessment is completed similarly to grant funding. A financial assessment of the application and applying company is also done. First, a creditworthiness check is made on the information provided, in particular, this looks at liquidity and debt service cover. Applicants which pass creditworthiness and technical assessment are then interrogated in more detail from a financial and managerial perspective.

To make a successful application for an Innovation Loan applying companies must have an innovative technology with a strong sales pipeline, a strong management team, and detailed financials to support the investment decision.

How TBAT can help

At TBAT we have supported several successful loan applications. Our team of highly experienced experts can help pull together all the required information for a strong proposal. Please contact us for further information.

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