Early stage companies, innovative start-ups and small companies wishing to develop new products have for decades used grant funding to develop products and services, because their ground-breaking ideas were “too risky” for conventional funding routes and because the business could grow without the loss of equity. Over the last two decades grant funding has become extremely competitive, causing problems for both applicants and indeed the grant funders themselves. Governments around the globe recognise that innovative SMEs are a very important driver in the economy now and in the future. The quest has been on to find funding instruments to support and accelerate the growth of small innovative companies in addition to grants.
The emerging answer is “Innovation Loans”. There are several models for innovation loans, but underlying the various approaches are the ideas of Government co-investment along with commercial finance providers and the inclusion of tools to reduce business development risks. Innovation loans are to be found in localities ranging from Brazil and Saudi Arabia to the U.K. and the European Union. So, what’s on offer?
With the advent of Horizon 2020’s SME mechanism in 2013, an innovation loan component in the programme was created. The SME mechanism has three phases, the first two are grant funded, but in Phase 3 financing is via introductions to funding bodies or loans backed by the European Investment Bank (EIB). Phases 1 and 2 act as a relatively low cost investment for the EU to qualify the innovation and support its advance to a potentially loan funding stage. Collaboration with finance providers is on the basis that the project has been partially de-risked by the first two stages of the mechanism. The SME mechanism has proved very popular with European companies, with the grant phases 1 and 2 being heavily oversubscribed. The statistics for Phase 3, the innovation loans component, would suggest that the bulk of the funds have been directed to the M end of the SME definition, who are more financially stable and thus less risky. The next Commission programme in development, Horizon Europe, may address some of the short-comings in the innovation loan component of the mechanism going forward.
Based on the 2015 Spending Review Innovate UK introduced its own innovation loan scheme in 2017, as a pilot, and based both on success and some lessons from the first rounds has continued the scheme to date. In the initial pilot up to £50 million was made available for SMEs innovation projects allowing companies to borrow between £100,000 and £1 million. Starting in late 2017 the pilot was extended to 2019 with an additional £25m funding.
How does the Innovate UK Innovation Loan Scheme work?
- Borrow £100,000 – £1 million for up to 10 years to support your later stage R&D project.
- In the first 3 years you pay interest only at 3.7%.
- A 2-year extension is possible on your loan terms where you still only pay interest.
- The loan repayment period is 5 years, with payments made quarterly, including interest.
The pilot has been evaluated by SQW on behalf of Innovate UK. Of 393 applications received, with requests for £200m in funding, 69 loans have been agreed. The case studies reviewed by SQW were a mix of both successful and unsuccessful applicants, in an approximate ratio of 1:2. The loans were viewed very positively, allowing companies who could not secure investment elsewhere to fund innovation. The loans address a funding gap and supported the acceleration and scale up of projects. In addition this support made securing further follow-on funding easier for recipients.
Further details of the Innovate UK “Innovation Loans” scheme are available on the Innovate UK website.
MSC R&D can help you decide if this is the right source of funding for your business, and help you access it.
Contact us on 0114 230 8401
