Applications opened on 20 May 2020 for the government’s £250million Future Fund loan scheme, a further form of financial support for UK businesses coming out of the COVID-19 pandemic. The scheme can support businesses with their ongoing cashflow requirements, enabling the business to focus on resuming its pre-lockdown trading position. Demand for the scheme has been incredibly high, with applications for more than double the initial funding commitment of £250million being received on the first day alone. However, it is not too late for your company to apply for the scheme.
It is anticipated by many that the government will support new applications and increase the commitment amount as the scheme is seen to be stimulating the growth of UK businesses. Government guidance is that the funding amount will be kept under regular review and the Chancellor, Rishi Sunak responded to questions in the House of Commons on 18 May 2020 to say that if there is demand, the government would be “more than happy to expand the scheme.”
Are we eligible?
Under the scheme, eligible innovative companies facing financial difficulties as a result of COVID-19 will be able to access loans from investors (between £125,000 and £5million) which will then be matched £1 for £1 by the government. Due to this matched funding element, to be eligible a company must already have investors lined up.
In addition, the company will be eligible for the Future Fund scheme if it:
- Is an unlisted UK registered company;
- Was incorporated on or before 31 December 2019;
- If part of a corporate group, is the ultimate parent company;
- Has one or both of the following:
- Half of more of its employees based in the UK
- Half or more of its revenue from UK sales
- Has raised at least £250,000 in equity investment third party investors in the last five years (1 April 2015-19 April 2020).
Should we accept the commercial terms?
Successful companies will be issued with funding in the form of a convertible loan note which is a loan instrument that can be converted into shares at a specific point in time. Convertible loan notes are a reliable and established method of investment and the Future Fund loan notes are similar to the loans available from existing investors on the market. Although the Future Fund loan notes are in a standard form and the commercial terms are largely non-negotiable, there are some negotiable elements which give more flexibility.
We would recommend that you consider the terms in detail when applying and take professional advice on them. However, we have considered some of the key terms below.
- Conversion: the loan will convert into shares on maturity or an earlier event and the investors will get the most senior class of shares.
- Interest: the interest rate is negotiable, subject to a minimum of 8% per annum.
- Repayment: the company is not permitted to repay the loan in full without the consent of the investors.
- Conversion discount rate: this is negotiable, subject to a minimum of 20. When the loan converts to shares, the Treasury will get at least a 20% share price discount.
- Use of the loan: the fund is a bridging loan with the aim being to support companies’ working capital and so funds cannot be used to things such as repayment of shareholder loans, dividends, distributions and bonus payments for the first 12 months.
Will the scheme be compatible with existing funding?
The Future Fund may not be available to companies who have existing or proposed funding arrangements. If you have investors lined up who have made an online application, it is important to consider your existing funding. Applicant companies are required to self-certify that the loan does not conflict with any of its existing debt funding. The company’s existing investment documentation will need to be reviewed and if necessary amended.
If you already have convertible loan notes outstanding, it is likely that the terms of these will conflict with the scheme. Further, the scheme is not eligible for SEIS or EIS relief. This means that if you already have SEIS or EIS angel investors lined who are ready to invest, they will not want to invest through the scheme.
How do we proceed?
If you have investors lined up and are eligible, the lead investor (if they have not already) will need to submit an application on the online portal. Applications are open until the end of September 2020, and although applications are dealt with on a first come first served basis, as mentioned above, it is not too late to apply.
Once the investor has applied, the company will be required to verify and submit certain information. Successful companies will require a solicitor to deal with the onward transfer of funds and so need to nominate a UK regulated firm of solicitors. We would recommend that you take legal advice at the application stage to assist in ensuring that the terms of the loan note are acceptable for your business and do not conflict with any existing debt funding.
How can we help?
If you require advice in relation to your eligibility or the terms of the Future Fund scheme, our Corporate team can help. We will be able to support you through the application process and assist you in understanding the documentation and your obligations under it.
If you would like to instruct us as your UK regulated solicitor to deal with the transfer of funds, please get in touch and we will be happy to discuss what is required.
Please contact Yavan Brar on 01189 899713, Matthew Lea on 01189 898155 or Chris Gemson on 01276 854669.
This article reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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