When an entrepreneur embarks on their journey to build and scale an innovative small and medium-sized enterprise (SME), there are always challenges and setbacks. The high-risk nature of research and development, the need to raise adequate capital, the aim to disrupt an existing market or create a new one are all challenges that are to be expected.
Unknown risks
An entrepreneur aims to mitigate these risks at the outset through extensive due diligence and planning. However, even the best laid plans are unlikely to have factored in:
- a global pandemic
- disrupted supply chains
- a terrible war in Ukraine
- soaring inflation.
The impact of these macroeconomic conditions over the past 24 months has been terminal for many businesses across the UK. With a portfolio consisting entirely of innovative SMEs, commitments of £166.5 million and 194 borrowers, the Innovation Loans team have seen these challenges first-hand.
Unprecedented disruption
As our companies shared their experiences of COVID-19 and the supply chain crisis, some of the situations were quite extraordinary.
Component shortages which had increased lead times from two weeks to 52 weeks, materials with delays of up to six months and machinery quoted at 18 months in some cases. It is fair to say that even the most conservative forecasts would not have factored in that degree of disruption.
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Change requests
To put this in context, between January 2021 and April 2022 we received 186 requests from portfolio companies to amend their original project plans and loan terms. A breakdown of these requests is detailed below.
Project change requests:
- 57: requests seeking an extension to the original loan term
- six months: average length of extension requested
- 26%: number of requests as a direct result of COVID-19
- 18%: number of requests related to supply chain issues.
Drawdown change requests:
- 129: total number of requests seeking to delay or accelerate drawdowns
- 27%: number of requests as a direct result of COVID-19
- 20%: number of requests related to supply chain issues.
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Facilitating change requests
As a lender we fully appreciate the nature of the businesses we are funding. We pride ourselves on being flexible and supportive, allowing every opportunity for success. Facilitating the sheer volume of change requests and approving some form accommodation every case is testament to that approach.
There are three key components that have allowed us to provide this ongoing support:
- Companies: the level of openness and transparency from the companies across our portfolio has been remarkable. Providing us with full details of the challenges being faced, regardless of how difficult, has been an essential component in navigating this period.
- Monitoring officers: our monitoring officer (MO) cohort have provided invaluable support to our companies and relayed vital information to us. Their focus on ensuring that projects are given the best chance of success is critical to the success of the loans programme.
- Relationship managers: there to support the wider business, if required, on areas such as:
- fundraising
- commercialisation
- loan restructuring.
Building collaborative relationships with our portfolio is essential as we move forward.
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Communication
The ability to understand the challenges being faced and provide bespoke solutions for our portfolio highlights the benefit of having both a relationship manager and an MO involved. Where delays are experienced or flexibility is required, it is critical that our companies speak to us and bring this to their MO as soon as possible.
As a team we are under no illusions that the macroeconomic environment remains as challenging as ever. There is no obvious end in sight, and we know that our need to be flexible will continue in the months and years ahead.
Innovation is risky and market conditions are difficult, but the opportunities are still there for the businesses we support to achieve real growth at scale.
Further information
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Richard joined the Innovation Loans team in November 2020, prior to that he worked in Corporate Banking at Allied Irish Bank and Consulting at PwC.
Having dealt exclusively with large corporate organisations for 10 years Richard sought a new challenge, working with small and medium-sized enterprises (SME). Innovation Loans provided the perfect opportunity to get involved in this area, working with companies on their journey to growth and scale.
Coming from a financial services background Richard had limited insight into the world of innovation prior to joining Innovate UK. However, he has thoroughly enjoyed learning about the work of portfolio companies and their impact on the wider UK economy.
Richard looks forward to welcoming many more innovative UK SMEs to the portfolio in the coming years.