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Innovation loans – could you be eligible?
Three options for funding later stage R&D projects – the pros, the cons, and the role of Innovation Loans
Innovate UK is part of UK Research and Innovation, a public body funded by the UK government, that supports businesses to develop and realise the potential of new ideas across a whole range of industries and sectors.
Innovate UK is running a pilot programme of loan competitions over 2 years to the end of 2019, offering a whopping great £50 million to support UK business innovation projects. The first 13 recipients of the loans were announced in June 2018, between them receiving £8 million in funding.
The team at The Business Finance Guide caught up with Nigel Walker, Head of Innovation Lending at Innovate UK, at ICAEW’s recent Innovation Investment Conference, to find out more.
Nigel Walker explained a little about the funding options available to innovative UK businesses, and what’s special about Innovation Loans, “They aren’t about filling a gap in the market – today there are lots of finance options for growing businesses. Rather, we are passionate about getting people to be much more innovative.”
Nigel continued, “if a business is talking about fast, explosive growth, but is at a very early stage, finding an investor or investors is a smart idea. But when a really innovative idea is at a later stage, with the science and market proven, and requires an injection of cash to get it to the next level, an Innovation Loan could really help.”
What is innovation?
Search online for “innovation”, and you will find two helpful definitions:
- The action or process of innovating;
- A new method, idea, product, etc.
It is not specific to a particular industry sector – but if you are looking for investment, it does need to be unique. To demonstrate that your innovation is eligible for funding, you also need more than just a great idea. Investors are looking for evidence – perhaps scientific, or perhaps market or research-based. A business plan is vital.
With a strong business focus, Innovate UK drives growth by working with companies all over the UK to de-risk, enable and support innovation.
They connect businesses to partners, customers and investors that can help them turn ideas into commercially successful products and services, and support business growth.
Innovate UK is working to broaden the range of innovation finance support available to businesses, so they can access funding at all stages of innovation, which need different types of funding support depending on how close they are to market. The lack of funding available to innovative businesses at the right time is a real barrier to their productivity and growth.
Innovation loans were introduced in 2017 to offer a new finance option for innovations that are near to market. Throughout the 2-year pilot, they will be offered through loan competitions to UK-based small or medium-sized enterprises (SMEs) that want to scale up and grow by developing new or improved products, processes, or services.
They can be used for late-stage research and development (R&D) projects that have not yet reached the point of commercialisation.
According to Nigel, there are three real options for financing a later stage innovation project:
Option 1 – R&D Tax Credits
R&D Tax Credits, administered by HMRC, allow business owners to claim back tax relief on corporation tax if they are making a profit, or to claim a tax credit if they are making a loss. There are different types of R&D relief depending on the size of the business, and whether the project has been subcontracted or not.
Small and medium-sized enterprises (SME) R&D Relief
You can claim SME R&D relief if you’re an SME with less than 500 staff, and a turnover of under €100m, or a balance sheet total under €86m.
You may need to include linked companies and partnerships when you work out if you’re an eligible SME.
SME R&D relief allows companies to:
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- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- claim a tax credit if the company is loss making, worth up to 14.5% of the loss.
To check if your business is eligible for R&D tax relief, follow this link on the government’s website.
Research and Development Expenditure Credit (RDEC)
Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. This can also be claimed by SMEs and large companies who’ve been subcontracted to do R&D work by a large company. The RDEC is a tax credit for 11% of qualifying R&D expenditure up to 31 December 2017, and 12% from 1 January 2018.
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R&D tax credits are guaranteed – once you have established that a project is eligible – which is ideal for many businesses, but because they can only be claimed in arrears, cashflow can still be a significant challenge for many. Find out how to apply for R&D tax credits.
Option 2 – Innovation Grants
Innovate UK runs grant funding competitions that can help you develop your idea and make it successful. They are open to innovation projects led by a UK-based business or research and technology organisation, with funding awarded to the winners. You can find out more about the grants on the gov.uk website.
You can apply for funding if you want to do one or more of the following:
test the feasibility of your idea and make sure it will work;- create a new product, process or service, or improve an existing one, through research and development;
- work with other businesses or research organisations on collaborative innovation projects.
Depending on the competition, you may work alone on your project, or form a consortium.
These grants are competitive and may be ‘open’ in scope or may be focused on specific challenges, such as in the Industrial Strategy Challenge Fund. If successful, you will receive funding quarterly in arrears – more frequent payments than you might receive by using R&D tax credits alone – but still always with a slight delay, so business owners need to pay close attention to the liquidity or cash position of the business.
Option 3 – Borrow money
The challenge with borrowing, or “debt finance”, for R&D projects and innovative companies, is that often the business does not have a huge amount of assets against which to secure a loan, so this funding can be harder to find.
Nigel puts this in simple terms: “The riskier and more innovative the project, the harder it is to borrow”.
Innovate UK’s Innovation Loans could be the answer. Loans of between £100,000 and £1 million are available for relevant, eligible, and highly innovative projects lasting up to 5 years. There is a competitive process to apply for funding, and the current competition will run until Wednesday 5th September 2018, so there is still time for you to enter.
If you run a small business, working on a potentially game-changing innovation with strong commercial potential, you can find out more, and apply, using this link.
[accent_callout] The first Innovation Loans have been granted to 13 businesses working on the challenges of population growth, urbanisation, and climate change.In June 2018, the recipients of the first round of Innovation Loans were announced, between them being offered £8 million in funding.
CitiLogik: analysing how people move to identify and analyse demand activity
G-Volution: dual-fuel engines that are cheaper, cleaner and greener
Alert Technology: the world’s first portable asbestos detectors
Alcove: assistive Internet of Things-based technology for older adults
Catagen: catalyst emissions testing and simulation
Utonomy: smart gas grid control to increase biomethane injection capacity
3-Sci: moisture monitoring system for corrosion under insulation
Lightfoot: connected car technology
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