On 20th May, the government and the British Business Bank (BBB) opened the new £250 million Future Fund to applications. The scheme has been set up to help innovative UK companies and start-ups through the current period of economic disruption caused by the Covid-19 pandemic.
It has been reported that more than 320 early-stage, high-growth firms have so far benefitted from £320 million of support through the Fund, already surpassing the £250 million initial funding made available. Due to the popularity of the Fund, the scale of the scheme is being kept under review.
The scheme is taking applications until September 2020, so we have put together a guide of everything we know about the Future Fund scheme to help businesses who are thinking of applying.
What is the Future Fund?
The Future Fund is a scheme that is available for applicants until the end of September. This is the treasury’s latest collaboration with the British Business Bank to support businesses amid the Covid-19 pandemic. The fund has been pegged as helping ‘innovative businesses’, and now the general understanding is that the fund is for UK incorporated business start-ups who have seen the interest of venture capitals dry up during this worldwide pandemic.
Unlike the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS), which deal only with debt funding, the Future Fund scheme will issue convertible loans between £125,000 and £5 million. This funding will then automatically convert to equity at the companies next funding round.
The only problem is to get one of those loans you must secure match funding that is as much as or greater than the amount being invested by the 3rd party investor. Just as the CBILS and the BBLS were set up to encourage lenders to lend money to businesses in need, the Future Fund encourages investors to invest in businesses in need.
The fund has been set up to support continued growth and innovation in sectors as diverse as technology, life sciences, and the creative industries. The Chancellor of the Exchequer, Rishi Sunak, has said:
“Our start-ups and innovative firms are one of our great economic strengths, and they will help spur our recovery from the pandemic.
The Future Fund will support firms across the UK to get through the pandemic by stimulating investment so that they can continue to break new ground in technology and innovation.”
How does a Future Fund loan work?
Future Fund loans are often referred to as CLA’s, which stands for conversion loan agreements. A conversion loan is a loan that can be converted into equity at a later date. The Future Fund convertible loan will have an 8% P.A. minimum non-compounding interest, but investors can agree a higher term with you.
These loans are not like regular bank loans that have monthly interest payments, you either pay back the interest when the loan converts or it’s subtracted from the final share value. The loans mature after 36 months, and you also cannot pay back the loan early, unless all investors agree. If your business defaults before then you will have to pay back the interest up until that point. Fundraising events can also trigger the conversion of the loan into equity.
Conversion discounts are a way for investors to convert the loan amount, plus interest, at a discounted price. In the case of the Future Fund, the discounted price of the loan is 20% unless you agree on a different discount with the investor.
Who is eligible for the Future Fund?
The fund is open to all work sectors, but in short, you need to:
- Have raised at least £250,000 equity from 3rd party investors in the previous 5 years
- Be an unlisted company
- Be based in the UK
- Have been a UK incorporated company since 31st December 2019
- Be the parent company for companies that are part of a group
- Have either half of your employees UK based or at least half of your revenues coming from UK sales
- Be able to attract funding from private investors which at least matches the value of the loan from the governmen
Recent changes to the eligibility criteria mean that UK companies who have participated in highly selective accelerator programmes, who were required as part of the programme to have parent companies outside the UK, will now also be able to apply for investment.
To find out the full eligibility criteria for the Future Fund scheme, click here.
How do you apply for the Future Fund?
The short answer to this question is that businesses cannot apply for the Future Fund scheme. The Future Fund scheme is open to application from investors only, meaning that business start-ups will not be able to apply.
Only one lead investor is allowed to apply on behalf of the business, but only if they’re investing at least £12,500. The lead investor doesn’t need to be the largest in the business, but they do need information on other investors, along with information about the start-up business itself. You will also need to make sure that the lead investor has full shareholder consent.
As the ‘investee company’ director, you will have to create your account on the Future Fund portal. This is so that you can submit the company information you send to current shareholders, along with documents that the BBB can use to make general fraud checks and check your company’s status.
There is a lot of information that you will need to provide, including your turnover and ownership structure charts or supporting documents that show all ultimate and intermediary beneficial owners of 25% or more of the business. If your application is successful, you will need to submit information and documents quarterly so the future fund can update its portfolio.
One problem from the Future Fund is that it will take 21 days to receive the money. Of course, the faster you submit the forms and information for checks, the faster the process is likely to be, but you should wait before you make any plans on how you are going to spend your Future Funding.
Who can invest in the Future Fund?
Any private investor can match the funding under the Future Fund as well as corporate investors and VC’s, but these don’t need to be UK based. The rules allow you to have up to 147 investors before you and your company has to produce a prospectus. Companies with less than 150 investors face an exemption from prospectus regulations, and you have to cap the numbers at 147 because the Future Fund and your lead investor count as two, but you will have to find your investors yourself.
It is OK for the same person to be a lead investor in as many companies as they want as long as when applying on behalf of the company, they submit separate applications for each company. But this means individual investors cannot claim from the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS) because of the restrictions on state aid. Both of these schemes provide tax relief to private investors.
Start-ups don’t necessarily need to worry if they had EIS or SEIS funding in previous funding rounds. The BBB has said that the government will amend the rules when the future funding loan is repaid to confirm that it is compatible with any previous EIS or SEIS schemes.
What is wrong with the Future Fund scheme?
100% redemption premium
The government investment in your business under the Future Fund scheme is structured as a convertible loan note. An interest-bearing loan that can either be converted to equity or be repaid. The chances are, that you and your company will want to go with the conversion option though because repayment comes with a huge 100% redemption premium.
Most businesses will likely follow the standard Future Fund procedure in which their loan automatically converts to equity at the next funding round. If you decide to sell your business or IPO, the Future Funding loan can still convert to equity.
However, in the case of a sale or IPO, the government’s headline terms state that you will have to pay the funding back with a 100% redemption fee if it provides the lender with a better rate of return than covering equity.
So in full, you can be forced to pay back double what you owe plus interest if you sell or IPO before your next funding, and you could also find yourself in a similar situation if the terms of your future funding expire before your next eligible funding round.
The application process isn’t fast, or flexible
The BBB has been clear that it’s going to process applications on a first-come, first-serve basis. The size of your loan request will not affect the time, and there are multiple application streams for the Future Fund, so it is a waste of time applying for a figure that you think will be approved quicker.
If an investor completes multiple applications for different businesses on the same day, the BBB will only look at one. This means that it will take a few days to go through the various businesses of that particular investor. It is important to remember that you are looking at a guaranteed 21 days of waiting as part of the application process.
When should you apply for Future Funding?
Given the number of business start-ups in the UK, which is around 300,000, the Future Fund could dry up very quickly. Due to the popularity of the Fund, more funding has been made available than the original £250 million, with around £320 million having now been invested thus far. The business secretary has stated that “the scale of the scheme will be kept under review.” Due to how popular it has already been, our advice is to act quickly if you’re planning to apply.
However, there is a lot of fine print and you should ensure you have done all of the necessary research and consult experts for help before even considering getting involved with the Future Fund.
Other useful points about the Future Fund Scheme?
Here are some other useful points about the Future Fund scheme that may help you make a decision:
- You can’t use a Future Fund loan to repay debt, pay dividends/bonuses or to pay advisory fees
- You’re still eligible to apply for a Future Fund loan even if you’ve already applied for funding under the CBILSor BBLS
- The Future Fund won’t have any effect on your R&D tax credits
How can Maple Accountancy help?
Do you need help with your business finances? Our expert team is always ready to help. We can tell you if your business is eligible for the Future Fund scheme, or any other funding, and help with your application. Get in touch with us today at email@example.com or 01332 207336 to find out how we can help you and your business manage your finances.