How are economic uncertainties impacting innovative businesses?

Action reaction, pendulum concept.

An insight into the challenges being faced across the Innovation Loans portfolio as a result of the current macroeconomic environment.

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.

3D illustration of collapsing cardboard.

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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.
Business meeting with financial advisor.

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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:

  1. 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.
  2. 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.
  3. 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.

Group of young modern people in smart casual wear discussing business while sitting in the creative office.

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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.

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