£250 MILLION LOAN SCHEME FOR HIGH-GROWTH FIRMS, CALLED THE FUTURE FUND
Future Fund is a £250 million lifeline of Treasury cash for innovative companies facing financial difficulties due to the coronavirus outbreak.
Future Fund is the brainchild of Chancellor Rishi Sunak who wants to help start-ups that count on equity investment and fall outside of the Coronavirus Business Interruption Loan Scheme (CBILS).
The Chancellor recognises the difficulties faced by innovative start ups to keep going during the coronavirus crisis and has set up the fund to ensure they can remain open for business.
Many are unable to seek a CBILS loan because they generate little or no revenue, do not make a profit or rely on equity funding, which makes them unattractive prospects for standard commercial funding.
How much can companies borrow?
Companies can borrow between £125,000 and £5 million as convertible loans matched by the same amount raised from private investors.
To pick up a £250,000 loan, a company would have to show ‘matched funding’ of £250,000 from private investors, making a total of £500,000.
Investors can stake more than the loan matched by the Treasury, but the limit of government cash stays at £5 million.
Future Fund loans will not match recently closed money raising rounds.
Who can borrow from the Future Fund?
All kinds of businesses can apply for a Future Fund loan – from start-ups and micro companies to large multi-nationals across any business sector.
At this stage, the Treasury has not hinted at any business type exclusions.
Qualifying for a Future Fund loan
To unlock the investment, companies must tick a few boxes:
- They are based in the UK and must generate revenue from marketing to customers in the country – the test is not how much but to confirm the business is predominantly active in the UK
- They have pound-for-pound match funding from third-party investors
- They have already raised £250,000 or more as equity investment from third-party investors during the past five years
- The business should be unlisted but incorporated in the UK
- If a company belongs to a group, only a UK registered parent company can apply for the loan
- The business does not have to show impact by coronavirus
Other tests are expected to apply when the government publishes the final details of Future Fund.
When can companies get the money?
Future Fund launches on May 20 and stays open until the end of September 2020. The British Business Bank will oversee applications.
How can companies spend the money?
Future Fund provides working capital to keep a business going through the coronavirus crisis.
The money cannot go towards paying down other borrowing, to reward staff, management, shareholders or consultants with dividends or bonuses or to pay external advisers for helping to arrange the loan.
Future Fund repayment terms
Businesses will pay 8% interest to the Treasury when the loan matures after a maximum term of 36 months.
How Future Fund works
A business with a Future Fund loan automatically converts the debt into equity on the next funding round raising at least the same amount of capital as the value of the loan.
Some strings are attached:
- The conversion comes with a 20% share value discount in favour of the Treasury
- Any converted shares stay as part of the most senior share class of the business
- The Treasury can sell on shares to institutional investors as part of a packaged Future Fund portfolio
- If the company enters another convertible loan agreement on more favourable terms than the Future Fund loan, these terms also apply to the Future Fund
If a funding round does not raise enough capital to cover the Future Fund loan, if the matched investors agree, the switch from debt to equity can still go ahead at the discount rate.
The Treasury has also hinted the discount rate rule will apply to an IPO or when the loan term ends.
During the loan term or period the government owns shares in the business, the Treasury will have some governance rights, but the full details have yet to be released.
In return, the company must treat the government fairly as lenders and/or shareholders and offer the same information rights to them as other investors and to comply any legal obligations to shareholders.
Will matched investors get SEIS or EIS tax breaks?
The Future Fund details published so far make no mention of Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) tax reliefs for private investors raising matched funds for businesses.
Find out more about Future Fund
This scheme will launch in May 2020.