22nd April 2020Covid-19 Support for Innovative Companies
On 20 April 2020 the Government announced a support package for innovative firms facing financing difficulties due to the coronavirus outbreak. The new package includes:
- An investment fund called the Future Fund which will issue convertible loans between £125,000 and £5 million to high-growth companies
- Grants and loans available to SMEs focusing on research and development (R&D)
The Future Fund scheme will launch in May 2020. It is intended to help those businesses that are unable to access the Coronavirus Business Interruption Loan Scheme (CBILS) and who are financed by equity investments.
In addition, grants and loans will be made available to the most R&D intensive firms with the first payments expected to be made by mid-May.
Together, these packages aim to help high-growth start-ups who may not be eligible to apply for other coronavirus assistance schemes announced by the Government, which require companies to prove their profitability and viability.
The Future Fund
Key Aspects of the Scheme:
- The Scheme will be provided in partnership with the British Business Bank.
- The Government has said that initially up to £250 million will be available for the scheme in total.
- Funding will be in the form of convertible loans from the Government which will be match funded by private investors.
What finance is available and what can it be used for?
The Government will make unsecured bridge funding (in the form of convertible loans) available alongside other private third-party matched investor(s). The Government loan must not be more than 50% of the total bridge funding being provided to the company.
The bridge funding shall be used solely for working capital purposes. The funding cannot be used to repay any borrowings, make any dividends or bonus payments to staff, management, shareholders or consultants or, in respect of the Government loan, pay any advisory or placement fees or bonuses to external advisers.
What are convertible loans and what are the key terms?
Convertible loans are loans that can be converted into equity. The conversion terms of the Government bridge funding are as follows:
- The funding shall automatically convert into equity on the company’s next qualifying funding round at a minimum conversion discount of 20% to the price set by that funding round with a company repayment right in respect of the accrued interest.
- A qualifying funding round occurs when the company raises an amount in equity capital equal to at least the aggregate amount of the bridge funding.
- On a non-qualifying funding round, the funding shall convert into equity only at the election of the holders of a majority of the principal amount held by the matched investors, at a minimum conversion of 20% of the price set by that funding round.
- A non-qualifying funding round occurs when the company raises less new equity capital than the aggregate amount of the bridge funding.
- On a sale or IPO the loan shall either convert into equity or shall be repaid with a redemption premium, whichever will provide the higher amount for the lenders.
- On maturity of the loan, the loan shall, at the option of the holders of a majority of the principal amount held by the matched investors, either be repaid with a redemption premium or convert into equity at a 20% discount to the most recent funding round.
- An interest rate of 8% per annum is applied to the loan, payable on maturity.
- The loan shall mature after a maximum of 36 months.
- The company will need to provide limited covenants and warranties to the Government.
How much can a company borrow?
- The minimum amount of the loan provided by the Government will be £125,000.
- The maximum shall be £5 million.
In order to apply for access to the scheme the company must:
- Be UK registered unlisted company.
- Be able to attract the equivalent match funding from third-party private investors and institutions.
- Have previously raised at least £250,000 in equity investment from third party investors in the last 5 years.
Full eligibility criteria will be published in due course.
The Scheme will launch in May 2020 and more guidance will follow.
Grants and loans through Innovate UK
Key Aspects of the Scheme:
- Funding for the most R&D intensive small and medium size firms will be available through Innovate UK’s grants and loan scheme.
- Innovate UK, the national innovation agency, will accelerate up to £200 million of grant and loan payments for its existing 2,500 Innovate UK customers.
- An extra £500 million will be made available to increase support to Innovate UK’s existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding.
How will the Scheme work?
The scheme will be operated by Innovate UK and it is expected that applications will be made via the current Innovate portal (which can be found here).
Different funds are available for companies to apply for depending on their area of R&D and it is expected that these funds will be expanded, so it is worth checking the website for new fund availability. It is expected that the first payments will start to be made in mid-May.
21 April 2020
These details are in accordance with Government guidelines on 20 April 2020.
The information contained in this guidance has been obtained from public sources and every attempt has been made to ensure its accuracy at the date of publication. In this ever-changing environment, this information is subject to change and we will not accept liability for losses arising from changes in the law or the interpretation thereof.