The Government has announced a new scheme to issue convertible loans to innovative companies which are facing financing difficulties due to the Coronavirus outbreak: the Future Fund.
This scheme will provide government loans ranging from £125,000 to £5 million, subject to at least equal match funding from private investors. The scheme was initially open until the end of September 2020. The government has recently announced that this scheme will be extended until 30 November 2020 for new applications.
Am I eligible?
You are eligible if your business:
- Is based in the UK and is unlisted
- Was incorporated on or before 31 December 2019.
- Can attract the equivalent match funding from third-party investors and institutions
- Has previously raised at least £250,000 in equity investment from third-party investors in the last 5 years.
- Is the ultimate parent company, if in a corporate group.
- At least one of the following is true:
- Half or more employees are UK-based
- Half or more revenues are from UK sales
How to apply?
The Future Fund launched on 20 May 2020 and the scheme will be delivered in partnership with the British Business Bank.
This is an investor-led scheme, meaning that a lead investor applies on behalf of themselves and may provide information about other investors making up the investment round, in connection to a company.
The investor, or lead investor of a group of investors, would need to create an online account to be able to sign in and make applications – this can be found here. They could then provide information regarding the investment and confirm their eligibility. The application is then submitted in connection to an eligible company and the company representative (statutory director or the company secretary) then confirms they are happy for the application to be submitted.
There is certain information that investors will need to provide when they apply for the Future Fund. These details can be found here.
The distribution of funds for successful applications will be handled through a nominated company solicitor. It is the company’s responsibility to appoint a solicitor with the necessary right to practice and handle client monies.
There is then a requirement to submit quarterly management reports from the company to the Future Fund.
What are convertible loans?
Under this scheme, the Government would invest money into businesses. It is not a grant, rather it is considered to be a loan. This loan can be converted into shares in your business!
What can I use this funding for?
This funding should be used solely for working capital purposes and should not be used to repay any other borrowings the company may have. In addition, this funding should not be used to make any dividend payments or other distributions.
For a period of 12 months from the start of the relevant convertible loan agreement, the funding should not be used to make any bonus or other discretionary payment to any employee, consultant or director of the company other than as contracted prior to the date of the agreement and as paid by the company in the ordinary course of business.
These funds should also not be used by the company to pay any advisory or placement fees or bonuses to any corporate finance entity or investment bank or similar service provider.
What is match funding?
Where the government will invest £125,000 into a business, the business would also need to seek £125,000 from external investors, therefore the total investment into the business would be £250,000. Previous funding does not qualify as matched funding for this scheme. The matched funding must be via a convertible loan.
Can the matched funding be invested as normal equity?
Based on the Headline Terms, the Future Fund requires the match investment from private investors to be in the same form as the Government’s investment, i.e. a convertible loan on the Government’s minimum terms. Equity would not count towards the matched funding requirement.
What is equity investment?
This is where companies issue shares to investors in order to increase their cash reserves. This is either done at the share value or at a premium.
What is an investor?
In order to be eligible for the scheme, each investor must meet specific criteria listed by the British Business Bank. These details can be found here.
Will this loan qualify for SEIS or EIS relief?
Based on the Headline Terms, convertible loans would not meet current SEIS or EIS qualifying requirements. As a result, investors that wish to make a matched investment alongside the Future Fund would not be entitled to the relevant tax relief that would otherwise be applicable. However, investors would receive the benefit of the conversion discount, interest and redemption premium as set out in the Headline Terms.
Can I repay this loan?
This loan cannot be repaid at the election of the company, but it is repayable in some circumstances such as a sale of the business or when the loan matures, with a 100% redemption premium on the repayment.
What is the loan length?
The loan will mature after 36 months, after which time the loan will either convert into equity or be repaid.
What is the interest rate on these loans?
The government will receive interest of at least 8% a year on these loans, which will be paid on maturity.
Does my business need to be suffering from a COVID-19 downturn to be eligible for this funding?
No, there are no eligibility criteria related to being a business in distress.
For further Frequently Asked Questions, please refer to the British Business Bank details, which can be found here.
We are here to support your business, if you have any concerns please call us or email Mark or Andrew.
The content in this blog is correct as at 20/05/2020. See terms and conditions.