So the rumours have proved to be correct, the Government plans to replace up to £195m of Innovate UK grants per annum with loans. The following statement comes from the BIS press release on their Spending Review Settlement:

The government will introduce new finance products to support companies to innovate following best practice in countries such as France, Finland and the Netherlands. These will replace some existing Innovate UK grants, and reach £165 million per year by 2019 to 2020, so that total Innovate UK support is maintained in cash terms.

The benefit for George Osborne is clear, the money comes out of a different budget allowing him to claim savings in the BIS budget, whilst still claiming to support innovation in the UK.

The problem for those innovative businesses, however, is that a loan really is quite different from a grant. Yes, it is still money to spend on a specified innovation project but – and it’s a very big but – a loan is repayable.

The sorts of projects being supported by Innovate UK are very often high risk, early stage innovation projects. The idea is to encourage business to take the risk by helping out with some of the cost. By replacing grants with loans, Osborne has just increased the risk profile of those projects again.

A small company looking to develop new technology simply may not have the income flow to support the research and development. A grant from Innovate UK allows them to undertake the work. On the surface, a loan does the same thing. However, the loan has to be serviced and, ultimately, repaid. What if the project is unsuccessful – or even just not as successful as hoped – the company may not be generating sufficient income to service the loan, let alone repay it.

Then there’s also the wider question of the company’s financing profile and possible banking covenants. Where will these loans rank alongside other financing?

Switching from grants to loans is clearly attractive for the Chancellor but I don’t see that it will do anything to help grow the UK as a base for innovation.

Of course, what we don’t know at this stage is any of the detail of these proposals. For example, on what sort of terms will the loans be advanced (interest and repayment periods) and will the funding levels (per project) be the same as at present? Ironically, the change from grants to loans could mean that those innovative companies are able to claim greater R&D tax relief.

I hope that more details will become available very soon.