4 August 2020|Fundraising, Latest Posts, Money
James Tillotson, Partner at Wellers, discusses how entrepreneurs can benefit from government loans for innovative, third party investor backed businesses, including those carrying out research and development.
The UK Government has announced its plans to gradually ease lockdown restrictions, which comes at a crucial time for SMEs as it has recently been reported that many have only enough money to survive another 12 weeks.
In fact, some are having to turn to cost-cutting measures, with thousands of jobs in the balance despite the Coronavirus Job Retention Scheme which has allowed many to be furloughed rather than made redundant. Now, the Chancellor, Rishi Sunak, has unveiled another rescue package of £1.25 billion for British businesses, aimed specifically at the start-ups and scale-ups.
The UK Future Fund
Aimed specifically at fast growth businesses, the Future Fund is a £500m co-investment between the Government and third-party investors. Available from now until September, the funding offers Government loans from £125,000 up to £5m per business, however this is subject to at least equal matched funding from the private investor. There is no limit to how many investors may loan a single business money.
Unlike other Government support schemes, like the Coronavirus Business Interruption Loan Scheme(CBILS) or Bounce Back loans, because the funding is coming directly from the Government, as opposed to a bank, the loan must be repaid directly to the Government, with eight percent interest per annum.
Another caveat with this funding is that Future Fund loans can be converted into equity if the loan hasn’t been repaid within three years, or the business embarks on a future funding round, a sale, or an IPO (Initial Public Offering). In these instances, the Government’s loan will convert to equity at a 20 percent discount of the valuation set in the most recent funding round.
Of course, to avoid this, businesses can also just repay the loan. Although this will be highly dependant on the circumstances at the time. If a business is in a position to do this, it would avoid the need for valuations to be conducted, which would be difficult to do effectively due to the amount of uncertainty generated by the pandemic. What is important to remember, is that many of the businesses claiming through the Future Fund will not yet be profitable. So, taxpayer backed equity will not carry any governance rights.
Also of note is that investors will not be able to claim tax breaks through either the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS).
The Process and Eligibility
Unlike the CBILS, the Future Fund is investor led which means a lead investor must apply for the scheme as opposed to the business. Applications can be made online and require the lead investor (although they may be one of a group of investors) to create a client account in order to start the process. Whilst the investor needs to submit the application, it is the company director or secretary that must confirm their approval in order for the application to proceed.
The funds must then be distributed by a solicitor that is nominated by the business and has the necessary rights to handle client funds.
The eligibility criteria for the Future Fund is slightly more complex than it is for CBILS and for Bounce Back loans, and there are also restrictions placed on what the money can be used for. In order to qualify to apply for funding through the Future Fund, a business must:
· Be UK registered
· Be unlisted – shares must not available to the general public for trading and the company must not be on any stock exchanges
· Have raised at least £250,000 from third-party investors in the last five years
· Be the ultimate parent company if the business is part of a corporate, in order to receive the funds
· Be a limited company
· Have been incorporated on or before 31st December 2019
· Ensure half of all employees are UK-based, or half or more of revenue must be generated by UK sales
The purpose of the Future Fund is for a business to use it solely for working capital, with this in mind any proceeds cannot be used to:
· Pay dividends or other distributions
· Pay advisory fees or bonuses
· Repay any borrowing from a shareholder or related party
· Make any bonus or other discretionary payment for one year, other than what has been contracted before the Future Fund was obtained
Support for Research & Development
In addition to the £500m being provided to fast-growth businesses, Rishi Sunak has also unveiled that £750m will be made available via grants and loans, through the non-departmental public body Innovate UK, to smaller businesses that have a Research & Development (R&D) focus. This includes, but is not limited to, companies that operate within the aerospace, automotive, biotechnology, construction, defence, engineering, food, manufacturing, pharmaceutical, and software development sectors.
For those that have existing partnerships with Innovate UK, £200m of already allocated funding will be accelerated to them, and a further £550m will be made available to them. Any business which does not currently receive funding from Innovate UK may be eligible for up to £175,000 in finance.
Why innovative businesses?
What sets the Future Fund and the R&D Rescue Package apart from the other Government-backed loan schemes that Rishi Sunak has announced so far is that they can only be claimed by certain types of businesses. The Government wants to protect fast-growing businesses and those that invest in innovation because these are seen as the backbone of the UK economy.
These businesses have the ability to commercialise intellectual property and business models that can scale-up making them huge potential assets to the future growth of the economy.
They also cannot benefit from CBILS or Bounce Back loans if they are loss-making and need significant funding in order to scale.
Before seeking any funding or taking out loans, business owners should speak to their accountant to ensure it is right for their future prospects.