James Tillotson FCA on the government loans for innovative, third party investor backed businesses, including those carrying out R&D activities.
With the UK coming out of lockdown gradually, many SME businesses are said to be running out of money, fast!
Cost cutting measures are in full swing with many jobs now said to be at risk despite the UK's furlough scheme. In response the Chancellor, Rishi Sunak, has created a further £1.25bn rescue package aimed at specific UK start-ups and scale-ups.
In this blog post we detail what this package includes and how it will work.
What is the UK Future Fund?
The Future Fund is a £500m co-investment in fast growth businesses that are backed by third party investors. Available from May until the end of September 2020 during the COVID-19 pandemic, it works whereby loans made by the government are matched by the private sector.
Support for Research & Development focussed businesses
The government are providing £750m of funds to be distributed in grants and loans to smaller businesses with a Research & Development (R&D) focus through the non-departmental public body, Innovate UK.
How the Future Fund Works
The Future Fund is being implemented in conjunction with the British Business Bank. The funding works whereby unsecured government loans of £125,000 up to £5m will be offered per business for the purpose of working capital. This is subject to at least equal matched funding from private investors and there is no limit to the amount that said investors may loan the business in question.
Interest will be charged at 8% per annum and Future Fund loans may convert into equity should the business embark on a future funding round, or on a sale, or an IPO.
It means the government could have stakes in several hundred early stage businesses, if the debt isn't repaid within 3 years. Where this is the case, then the government's loan will convert into equity at a 20% discount to the valuation set in the most recent funding round.
Alternatively, the business could repay this loan depending on the circumstances at the time. This prevents the need to conduct valuations which would be difficult to do effectively because of the uncertainty generated by the pandemic crisis. Importantly, many of these organisations may not yet be profitable and taxpayer backed equity won't carry any governance rights.
It has been confirmed that the matched funding that third party investors have to make has to be exactly that (i.e. matched convertible loan notes). Unfortunately, and importantly for investors, this means that any such future matched investment would not qualify for the SEIS or EIS tax reliefs.
The scheme is an investor led one. This means a lead investor has to apply on behalf of themselves, and potentially, other investors making up the investment round in the business. It will be accessible through an online application process that will be made available on Wednesday 20 May 2020.
The lead investor will have to create a client account on the website to make an application. Whilst they will submit the application, the company director or company secretary then has to confirm their approval for the application to proceed.
In the event of a successful application, the distribution of funds has to be handled through a solicitor nominated by the business. This means they will need the necessary rights to practice and handle client funds.
The eligibility criteria requires businesses applying to:
Be UK registered
Have raised a minimum of £250,000 from third-party investors in the last 5 years through previous funding rounds
Be the ultimate parent, where the business is part of a corporate group
Have been incorporated on, or before, 31 December 2019
Have half of all employees based in the UK or, have half or more of revenue generated from UK sales
The proceeds of a convertible loan agreement can’t be used for:
Paying out any dividends or other distributions
Pay advisory fees or bonuses for corporate finance and/or professional services on monies advanced by the Future Fund
Repay any borrowing from a shareholder or a shareholder related party
For a year from the date of the convertible loan agreement, make any bonus or other discretionary payment to any employee, consultant or director of the company other than as contracted prior to the date hereof and as paid by the Company in the ordinary course of business
The R&D rescue package
The funding available to businesses focussing on R&D will be made available from Mid May 2020. Those organisations with existing partnerships with Innovate UK will see £200m of existing grant funding accelerated to them and a further £550m will be made available to them for draw down.
Organisations not receiving any Innovate UK funding will be eligible potentially for £175,000 of finance.
Why the funds are aimed at innovative SME businesses
Fast-growing SME businesses and those investing in innovative Research & Development are seen as the backbone to the UK economy. Their ability to commercialise intellectual property and scale-up is seen as absolutely vital to future UK growth prospects once the country comes out of lockdown.
Being loss making, and often requiring significant funding to achieve scale, means many have been ineligible for the government's existing coronavirus support schemes. This has attracted criticism in some quarters with suggestions that government support should instead be aimed at later stage, as opposed to seed phase, businesses that have proven business models.
This post was created on 23/04/2020 and updated on 29/05/2020.
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