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Delivering UK’s Innovation Strategy by supporting SMEs

Author: The Business Finance Guide

Published: 20 Aug 2021

Innovate UK will be at the forefront of delivering the UK government’s newly launched Innovation Strategy – boosting innovation amid post-COVID recovery by providing financial support to businesses.

The UK government unveiled its Innovation Strategy on 22 July, aiming to increase annual public investment in research and development (R&D) from £14.9bn in 2021/22 to £22bn by 2035 and create the conditions that enable businesses to innovate. It has emphasised the importance of innovation to the UK’s Build Back Better plan, economic prosperity and competitiveness, including in tackling key priorities such as COVID recovery and climate change.

Aims of the strategy include making government procurement proactive and supportive, looking at how regulation can support innovation, increasing training, attracting talent through new visa routes, and providing targeted support where there are funding gaps. However, the Innovation Strategy also highlights a lag in private sector investment in innovation in the UK compared to international competitors and the need to boost this significantly.

Innovate UK, the UK’s innovation agency and part of UK Research and Innovation (UKRI), will be playing a key role in delivering the new strategy. Within the next 12 months, for example, it will be developing an innovation hub to complement the British Business Bank’s finance hub, with links between them to make it easier for businesses to see the funding available from both organisations and reduce complexity.

Nigel Walker, Deputy Director of Lending and Investor Partnerships at Innovate UK, explains: “Our role, broadly speaking, is to stimulate and support business-led innovation as part of government. Innovate UK and UKRI want to deliver on its vision to foster an outstanding research and innovation system for the UK to which everyone has the opportunity to contribute and from which everyone benefits.

Outlining Innovate UK’s funding options, Walker says: “We typically provide grants for R&D projects and offer innovation loans, which are particularly focused on later stage R&D projects for small businesses where there is a clear route to commercial success. It has that economic impact, but also has a direct return to government that can be reinvested in further support for research and development.”

Innovation loans and grants

Since 2017, Innovate UK has been offering its innovation loans through a competition process that has seen around £156m awarded to 200 businesses. Micro, small and medium-sized businesses can apply for the loans, which can range from £250,000 to £1.6m, says Hemaxi Bhatt, Innovate UK’s Programme Lead for innovation loans. The amount will depend on the specific competition.

Grants also follow a competition process, with some being “challenge led”, aimed at tackling particular societal and economic issues, such as an ageing society, environmental challenges or more recent COVID-related issues.

Walker says: “If innovative solutions can be brought to address that problem, that’s good for society in the UK and indeed around the world, but it’s also a business opportunity.”

He adds: “For some businesses, the timing and the scope of those challenge-led programmes may not be relevant to them, so we also offer what we call responsive programmes. The Smart grants programme is probably the best known of those.”

Smart grant options

These Smart grant options are for businesses with game-changing or disruptive ideas, involving a totally new idea for a product, service or process, or a “brand-new use or unprecedented use” of an existing product, service or process.

Each competition will have specific eligibility criteria, and it must be clear what is being supported and that the right businesses and researchers are working together if it is a collaboration. Walker highlights: “The project needs to be delivered really well, so we want to see the right team, the right project management and the right risk management.”

He adds that the cost of the project that will be supported by government – and effectively taxpayers – must represent good value for money. Walker says: “Why is the taxpayer contributing? It’s because there is a need, there’s real value, there is impact in the future.”

Three key elements considered during the loan application process include the quality of the project, eligibility of the costs of the project and the organisation’s suitability for the loan.

Bhatt highlights: “It’s a great source of finance for businesses at that later stage of R&D and innovation. Banks won’t necessarily look at them at that point because they haven’t got the track record. At Innovate UK, we’re used to taking that risk – we’ll take on that innovation risk to support businesses to move forward towards commercialisation.”

COVID’s impact and lessons

Innovate UK also delivered specific coronavirus support packages on behalf of government amid the pandemic aimed at maintaining innovation continuity. This included continuity grants and loans to help with existing project funding, and a Sustainable Innovation Fund that saw close to 1,200 UK companies sharing £134m new investment from Innovate UK. Small business advisers were also put in place to help struggling businesses.

These types of activities provided additional stimulus to innovation despite the negative impact of the pandemic on the economy, and support to a wide range of sectors, from health-related personal protective equipment to the creative industries, in transforming live performances to online, explains Walker.

He adds: “When the economy is tight, it’s tempting for businesses to reduce the level of innovation and the R&D activity that they do. We ran two specific programmes that were about addressing this issue … the role of government during an economic crisis can be to continue to invest in innovation so that it doesn’t slow down.”

In its Innovation Strategy, the government has highlighted that key lessons can be learned from the pandemic, including prioritising innovation, being prepared to invest at risk, pursuing public-private partnerships and valuing non-monetised benefits.

Although various COVID-related funding or support packages from government may now have closed or be winding down, Walker and Bhatt remind that UK Innovate competition windows for innovation loans and grants are continuously refreshing.

Walker concludes: “The UK has a fantastic research base, has fantastic businesses that are innovating and the more that can be invested in research and development, the better the chances of economic growth in the future.”

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