Several start-ups and small businesses are coming up in the UK and making their presence worthwhile worldwide. This is all because of continuous innovation, which forms a crux of their business model.

These start-ups are leveraging modern technologies in artificial intelligence, machine learning, the internet of things, blockchain etc.  

Research and Development (R&D) expenses form a crucial part of these start-ups’ overall cost structure. This innovation and R&D efforts require money to spend by a company to differentiate their products and services. Innovation loans through the several lenders in the UK will finance them.

This blog will apprise start-up entrepreneurs, and business owners about a financing option in innovation continuity loans meant explicitly for corporate customers. These loans would ensure that your innovation shall never stop at least not due to lack of funds.

Let’s get to know what innovation loans exactly are, and when and why they came into being in the UK. 

How, When, and Why It Started?

The pilot project for these loans was started in the UK way back in 2017 by Innovate UK, a project financing company and has lent approximately £75 million by successfully lending to over 100 corporate customers.

The relatively lesser cash-rich small and medium-sized companies are taking full advantage of these loans to continue their R&D efforts. These loans came into existence to help such companies gain a competitive edge in their industry and contribute to the nation’s economy.

What are Innovation Loans?

Innovation loans are a unique initiative to support businesses in the UK. These loans help these companies scale up their operations and enhance their product offerings through innovation, thus the name ‘innovation loans’.

Businesses can innovate in improving their existing basket of products and services or develop new offerings for a current or new market.

Who Can Apply for Innovation Loans?

These loans’ target audience is typically the micro, small and mid-size UK enterprises. They usually find it challenging to raise funds from established commercial banks. These companies should ensure to convince the lender that they will manage the repayment and interest charged on loan.

Also, they have to prove that they could not access financing from other money providers in the likes of venture capital/private equity investors and other nationalised banks.

Some other restrictions on companies to be eligible to borrow these loans are:

  • The business cannot involve in ongoing insolvency proceedings
  • They have unpaid rescue aid which they have received in the past

If your business is under any restructuring mechanism, then also you cannot apply for these loans.  

Where Can You Use Innovation Loans?

By borrowing, companies can use to go ahead with a research and development project they have ventured on. They could be in early-stage, mid-way or a later stage of the R&D development project.

You have launched or about to launch new products and services. You can use innovation loans to develop prototypes of these products or run pilot projects for them. These loans can also cover the testing expenses for these service offerings. 

Coronavirus appeared out of the blue last year and has applied brakes to many economies’ running economic engines across the world. The world health organisation declared it as a global pandemic that also affected businesses involved in ongoing projects.

Project timelines and deadlines extended since people had to stay indoors and not go out for work. Employees working from home cannot run manufacturing businesses.

Many innovation loans providers are offering loans to such businesses which the lockdown imposed impacted them. It is available as a grant for the continuation of innovation since companies have started to open up slowly.

Many micro and small businesses have found themselves cash strapped and need immediate funds to resume their ongoing projects.

For instance: Innovate UK has pledged to lend £210 million to such MSMEs (micro, small and medium enterprises) and each loan could be in the range of £2,50,000 to £16,00,000.

Innovation Loans Procedure, Terms and Conditions

The borrower needs to apply for innovation loans online through any lenders website or app to disburse these loans. Some of the prominent innovative loans lender are Innovate UK, Growth Hub, Investni, to name a few.

This is a competitive procedure as many borrowers are vouching for it. Lender assesses your need, quality of project, eligibility, and repayment capability strictly before granting the loan.

  • The essential eligibility criteria is a borrower must be an MSME, which is based and headquartered in the UK and applying for financing for a project that fits the lender’s assessment.
  • An individual business can borrow from £1,00,000 to £1 million depending on the project cost. As a borrower, you can recover up to a maximum of 100% of all the costs involved in an R&D project.
  • The interest is applicable accordingly based on the borrowed amount, and the interest rate hovers between 3.5% to 5% depending on borrower’s profile and the loan amount.

I accrued and collected an additional interest rate during the repayment period when the borrower served both the principal amount and interest. The interest rate is lower to foster a culture of innovation in the business environment of the country.

The maximum tenor for these loans is 10 years wherein the first 3 years is the availability period, the next 2 years is extension period, and the last 5 years are repayment period.

Availability period is when the borrower uses the loan amount to fund his project. He does not have to repay the principal in this period, serve the interest component quarterly for the initial 3 years.

The extension period involves:

  • Going to market
  • Selling the offerings
  • Continuing paying the loan’s interest part

The fag end of the repayment period of 5 years involves actual repayment of both the principal amount and the applicable interest in monthly or quarterly instalment. These instalments in the repayment period will be higher due to additional interest rate in this period.

The lender might ask for collateral in the form of some asset or mortgage debentures, but this is not mandatory and depends on a case to case basis. Besides, he will not ask for any personal guarantee or a guarantor to represent the borrowing company.

Other conditions on these loans are that a borrowing company will assign a monitoring officer. He will be responsible for tracking the project’s progress after taking the loan.

Additionally, the borrowing business would need to agree to certain covenants for the loan’s complete tenor. The usual covenants are on liquidity and debt service coverage ratio.

In the former, the business has to prove that their current ratio (i.e. existing assets to current liabilities) should be at least 1.1 while withdrawing the money from their loan account.

The second covenant involves proving decent profit margins wherein the EBITDA (earnings before interest, tax, depreciation and amortisation) to debt repayment (both interest and principal) being a minimum of 1.2 during the repayment period.          

The other covenant type on these loans is the information covenant. It will subsume project monitoring to do quarterly and financial information to disseminate and submit via its financial statements prepared every quarter and annually.

In the Nutshell

There are several powers vested with the lender as well, and it will mention all of them in your loan agreement, thus read it in detail before signing it.

Some of these controlling powers are:-

  • Lender has the right to seek total loan amount to repay in the event of a change of control of your business
  • It will also monitor to take a call on the project’s success/failure status
  • It also powers to quicken the repayment process

There is several such controlling/approval power with the lender mentioned in the loan agreement in detail.  

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