Government’s Future Fund could prove costly for fast-growing businesses

Published by Jack Clipsham on 21 April 2020

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The Government announced yesterday (20 April) a new £250m fund to support fast growing SME businesses.

The Future Fund will make loans of between £125,000 and £5m to businesses, with loans needing to be match-funded by external investors. The Fund is only available to unlisted businesses that have a substantial economic presence in the UK and have previously raised external funding of up to £250,000 in the last five years. Loans will be delivered in partnership with the British Business Bank.

The loans, however, come with a catch: an interest rate of 8% and a trigger, such as an IPO or sale, that could see the loan converted into equity with a 20% discount to value,  or repaid with a 100% premium.

Jack Clipsham, Partner and Head of Corporate Finance at Kreston Reeves comments:

“Businesses may firstly find it difficult to secure match funding from external investors. The majority of investors, whether Family Offices,  VC investors or Private Equity firms,  are currently very much focused on  supporting businesses in their existing portfolios and not actively looking to make new investments. Businesses looking to take advantage of this pot of money are likely to have to turn to their existing investors who may well take a dim view of the Government’s terms.

“Secondly, whilst the 8% interest rate is quite high it is pale in comparison to the rates associated with the trigger mechanism – a conversion into equity with a 20% discount or repayment with a 100% premium. Whilst this may be a good deal for the Government, businesses and investors may disagree.

“We would recommend that businesses looking for cash to see them through these unprecedented times look first at the various other schemes the Government has introduced before exploring the Future Fund. If other options are not open to businesses, then the Future Fund might prove expensive but a viable option, particularly if loans are repaid in full before any trigger points.

“We do, however, expect the Government to make further changes to the terms of this fund, particularly opening it up to businesses with EIS and VCT funding. We recommend that businesses watch this space.”

Innovate UK grants and loans

In addition, the government has also announced £750 million of targeted support for SMEs focusing on research and development. The funding will be available through the grants and loan scheme of Innovate UK, the national research and development support agency. Funds will predominantly be available to Innovate UK’s 2,500 existing customers, whereby they will accelerate up to £200 million of grant and loan payments for its existing customers on an opt-in basis.

An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. The first payments will be made by mid-May. Eligible organisations include:

  • businesses
  • research organisations
  • public sector organisations or charities undertaking research activity

Funding rules are summarised here.

If you would like to discuss the Future Fund, contact Jack Clipsham here.

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