Innovation Loans: Frequently Asked Questions

Securing funding for innovation can be a challenge, especially for businesses working on late-stage R&D projects that require significant investment before reaching market readiness. That’s where Innovate UK loans come in — offering flexible, affordable financing to help UK-based SMEs turn cutting-edge ideas into commercially viable products.

In this FAQ, we break down everything you need to know about Innovate UK loans, from eligibility criteria and loan terms to the application process and repayment structure.

Innovate UK loans provide flexible funding to UK-registered SMEs to support late-stage research and development (R&D) projects. These loans help businesses bring innovative products, services, or processes closer to market readiness, with up to £2 million available for each project.

Innovate UK’s innovation loans are designed for SMEs at the later stages of development with strong potential for commercial success and a tested prototype. To be eligible, you must also demonstrate that your business is suitable to take on a loan, requiring revenues to support the repayments. You must also demonstrate that you’re unable to obtain funding from private sources.

To qualify for an innovation loan, your project must fall under one of the categories outlined in Innovate UK’s plan for action, which includes net zero, health and well-being, and next-generation technologies.

Yes, to be eligible for Innovate UK’s loan, you’ll need a prototype that is ready for user testing in the intended environment. This could include further developing an existing product or the addition of new features and prototype finalisation. It could also include testing with real-world users, pre-launch activities like test manufacture tooling, and regulatory work, scaling a development team, or carrying out market research. Note that market research does not include marketing or sales.

In short, yes, your subcontractors should be based in the UK. In rare cases, you can use subcontractors overseas, however, you must make a very strong case for this in your application and state the reasons why you could not work with UK-based subcontractors. Cheaper costs are not a sufficient reason.

Eligible businesses can borrow between £100,000 and £2 million, covering up to 100% of eligible costs of the project.

The Innovation Loan comes with long terms of up to 7 years, following these phases:

1. Availability Period (up to 3 years): Funds are drawn down while the project is ongoing.
   
   
2. Extension Period (up to 2 years): No additional drawdowns; focus on commercialisation.
   
   
3. Repayment Period (up to 5 years): The loan, plus deferred interest, is repaid.

When you receive an innovation loan, the interest rate is 7.4% per year, however, you only pay half the interest (3.7%) on the amount drawn down, with zero principal repayments in the first three years.

After this period, when you start generating revenue, you pay the full 7.4% interest, along with the deferred half-interest from the first 3 years, plus the loan's principal.

Innovation loan funding is available for SMEs carrying out late-stage R&D projects.

No, funding cannot be used for general business operations, sales, marketing, or routine business activities.

Yes, you can repay the loan early with no early repayment fees.

No, you may not apply as a collaboration. Only single applicants are eligible.

Applicants must submit:

• A detailed business plan with a commercialisation strategy.
• A financial forecast demonstrating loan repayment capability.
• A technical plan outlining the R&D activities.

Yes, Innovate UK will take a mortgage debenture over company assets. However, no personal guarantees from directors, founders, or shareholders are required.

Companies must provide:

• Quarterly management accounts.
• Annual accounts within six months of the financial year-end.
• Project progress updates to a Monitoring Officer.

Yes, according to Innovate UK, businesses must meet these financial covenants:

• Liquidity Ratio of at least 1.1x: Ensuring current assets exceed liabilities by at least 10% during the entire loan period.
• Debt Service Coverage Ratio of at least 1.2x: Ensuring earnings before interest, taxes, depreciation, and amortisation (EBITDA) sufficiently cover debt obligations during the repayment period.

While these are the levels laid out by Innovate UK, at Grantify, we require our clients to be at least 1.5x for both the liquidity ratio and debt service coverage ratio.

Failure to meet repayment obligations may result in penalties and enforcement of security rights. Innovate UK may also withhold any further drawdowns.

The loan agreement also contains a provision that permits Innovate UK to convert the loan and accrued interest into shares in your company if you are unable to repay the loan.

Absolutely, you can apply for other Innovate UK funding at the same time as long as it is not being used to cover the same costs as the loan.

The Innovate UK loan application process can be a minefield to navigate. We highly recommend reviewing Innovate UK’s guidance documents and webinars and seeking support from funding experts like Grantify to maximise your chances of success. 

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