The Chancellor has announced that fast-growing UK companies will be offered additional grants and private sector-matched funding in order to access capital during the COVID-19 pandemic. These two new schemes will run alongside the Coronavirus Business Interruption Loan Scheme (CBILS) which we discussed in any earlier Blog https://srcadvisory.com/blog/coronavirus-business-interruption-loan-scheme-cbils-major-update
Within these plans is a new COVID-19 £500m loan scheme called the Future Fund, which will provide UK-based companies with between £125,000 and £5m from the government, with private investors at least matching the government commitment.
Distributed through the British Business Bank, the loans will convert into shares in the companies receiving them if they are not repaid. The government plans to offer £250m until the end of September before reviewing the scheme.
To secure a loan, in the form of a convertible loan note, businesses must first secure an equal or greater amount of match funding from private investors, and be a U.K. registered private company that has previously raised at least £250,000 in private investment in the last five years.
So far, from the information released, it seems that no straightforward repayment option will exist. The reasoning is that British taxpayers would be exposed to all of the downside with very little or none of the upside. In practice, the best performing companies would likely choose to repay the loan and the worst performing companies (or at least those that did not become insolvent) would opt to convert to equity. A convertible loan note system that automatically converts is favourable because the U.K. government needs to hold discounted equity in the start-ups that succeed to offset against the ones that fail.
As mentioned above, conversion to equity will be mandatory, except in a few specific scenarios and at a significant premium. It seems that there would be a 100% redemption premium plus interest. So if the loan is paid back instead of being converted, the taxpayer will make more than a 2x return.
A further £750m of grants and loans will also be made available for small and medium UK companies involved in intensive research and development of new technologies, with funding channelled through Innovate UK, the government body for supporting business research projects.
Innovate UK (the national innovation agency) will accelerate up to £200m of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis, while an extra £550m will also be made available to increase support for existing customers. In addition, £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.
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