The Future Fund: a strong government compromise or an unrealistic request?

By Melissa Welch, Corporate and Commercial Associate

The government recently announced that it will be offering help to start-ups struggling to stay afloat due to the COVID-19 pandemic.

In reaction to the ‘Save our Start-ups’ campaign which swept across the media, the government has now provided guidance and support for those start-ups and SMEs who weren’t eligible for the Coronavirus Business Interruption Loan Scheme (CBILS).

This oversight could have had dire consequences for those businesses that were sadly falling through the cracks however, the latest government announcements provide an element of relief for these business owners.

The Future Fund; a brief overview

In partnership with the British Business Bank (BBB), the government has earmarked £250m to go towards ‘bridge-funding’ start-ups through the use of convertible loan notes as a way for them to maintain cash flow.

However, the devil lies largely in the detail, and the government has laid out eligibility criteria which must be met by all businesses hoping to qualify when applications for the fund open on Friday (1^st May 2020);

• Business must be an unlisted UK-registered company and have raised a minimum of £250,000 in equity investment in the last five years and have a “substantive economic presence in the UK”;
• Interest will sit at 8%; and
• All applications must be matched by additional third-party investors.

Provided the business in question can demonstrate the above criteria, they will be eligible to apply for a business loan of between £125,000 and £5m.

But will this new scheme be accessible to most businesses?

At Primas, we work with lots of small businesses and take great pride and pleasure in helping them to grow and flourish. As such, we very much backed the call for additional support for small and start-up businesses, and to me, the Future Fund is certainly a reasonable compromise.

By using convertible loan notes (which are short-term debts that are converted into shares at a later date), the government has bolstered the Future Fund with an established and reliable investment method, demonstrating that they have not deviated too far from the loans already available from existing investors in the market.

There has been feedback that the eligibility requirement is not inclusive of enough small businesses and start-ups, and to an extent, this is true. However, it is clear from the points set out in the required criteria that this scheme has been introduced to support businesses at a certain stage of their journey, and that they will receive a much-needed fiscal lifeline to help them keep going.

The unfortunate reality is that the government cannot support and fund every start-up through the Future Fund, particularly those that may fail to flourish (or that are not considered to have “substantive economic presence in the UK”).

To me, this seems a considered approach to fund those businesses with longevity and bright futures, which will ultimately allow investors to recoup their investment in the long run and yield a return for the taxpayers. They may even go on to make a profit.

What about small businesses who don’t qualify?  

The introduction of the government’s Future Fund does go a long way in helping more ‘viable’ start-ups with the potential to go far. This being said, it does leave the less established businesses (which are either too young or too small to have raised the required £250,000 equity over the past five years) with little to no support.

As I mentioned above, it is unfortunate that the government cannot create an all-encompassing scheme that supports businesses of all shapes and sizes. In light of this, I feel there is scope for the government to expand both the existing Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) and I know there has been chatter among investors that they would consider parting with their cash if the government was to raise the income tax relief for both schemes and increase the investment thresholds.

It has also been announced that the Chancellor has conceded to offer smaller businesses (who do not qualify for CBILS, Innovate UK grants or Future Fund backing) 100% government-backed rescue loans, known as ‘bounce back loans’.

These struggling businesses will be able to apply for ‘micro-loans’ worth 25% of their turnover, with a cap of £50,000. This comes as a direct response to the criticism faced by the government after many small businesses faced significant economic difficulty.

The combination of the CBILS, Future Fund and the newly introduced bounce back loans are certainly a step in the right direction in terms of support for businesses. Hopefully, most businesses will feel that the government has provided them with the much-needed backing they needed to survive this pandemic.

This is still very much a waiting game though as we hope for continued announcements providing support and funding for businesses. There are several open letters to the Chancellor calling for this, so let’s see if this is something that he is willing to consider.

Potential roadblocks

Of course, while the introduction of this scheme is certainly a step in the right direction for the support of qualifying small businesses, there are some potential obstacles that could inhibit businesses from qualifying.

The government is yet to provide further clarification around how they will assess “substantive economic presence”. It seems to me that this clarification is needed sooner rather than later, so that businesses know where they stand and can begin seeking matched investment.

Not only this, but I also question the viability of obtaining significant investment at such a troubling and, as we all know, ‘unprecedented’ time. The likelihood at the moment is that investors will be keen to focus on those companies in their existing investment portfolio, rather than taking a risk in backing anyone new. In light of this, businesses that are considering applying to the government’s Future Fund may be wise to hit up their current investors first and ask them to match the government loan.

At present, we also don’t know what the government is expecting this ‘matched funding’ to look like and how it will need to be structured. If the matched funding is also required to be by way of convertible loan note, this would be a huge disincentive to many investors, as convertible loans are not SEIS or EIS eligible.

Finally, it looks unlikely that businesses who take out this loan would be likely to pay it back at the end of the three-year period. From looking at the government’s headline terms around this, there is the option to repay the loan upon its maturity, but the redemption premium is equal to 100% of the initial funding, which is a very high redemption premium to say the least. Further to this, it also appears that the decision to repay the loan in full would be taken out of the business owners’ hands, and this decision would lie primarily with the company’s matched investors.

Does this scheme have longevity post-COVID-19?

Understandably, business owners and investors alike are becoming increasingly concerned about the financial rug being pulled from under them, once COVID-19 has run its course.

While I can’t offer comment on the permanency of other schemes that have been introduced in response to the pandemic, it would appear to me that the very nature of a Convertible Loan Note is a long term investment, as in the majority of cases, these do convert to equity further down the line.

This means that the loan will either be redeemed or converted into equity in the company, hopefully meaning that this scheme will provide small businesses, not only with a lifeline but also a bit of a leg-up. This should provide comfort to any business who finds themselves qualifying for the eligibility criteria.

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With so many new updates and measures being implemented at the moment, it’s difficult to know which one applies to you and your business. As fervent supporters of small businesses here at Primas, we’re hopeful that we will see many businesses come out of this as unscathed as possible. If you’re confused around what scheme you qualify for or require advice before making an application, one of our team would be happy to help.