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Chris Dobson


In its continuing efforts to keep the UK economy moving through the Coronavirus pandemic and in response to growing concerns over the numbers of business who have actually been able to utilise existing schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS), the Government has introduced two further lending initiatives, the ‘Future Fund’ and the ‘Bounce Back’ loan scheme.

The issues facing the CBILS are already well documented with many small businesses locked out of the scheme by virtue of banks taking a defensive approach to the risk of the shortfall emanating from the 80% Government-backed guarantee.

Faced with mounting criticism over loan rejections and delays in the process as a result of banks insisting on applicants going through their standard detailed lending criteria, the Treasury has ultimately taken the position that in order to streamline the process and encourage banks to open their doors, public funds will need to underwrite 100% of the loans being made to small businesses and this new approach has emerged under the newly unveiled Bounce Back scheme.

However, even with the newly simplified application process and extended guarantee, loans will still be dependent on banks getting comfortable around the historic financial performance of the borrower in question and so for many pre-revenue or pre-profit businesses it may still not be possible for them to access the new scheme. On that basis, the Government has launched an additional programme to offer convertible loans to companies falling into this category and who have a recent track record of raising investment – in other words, take note if you’re an innovative start-up.

Dubbed the ‘Future Fund’ the new government scheme is being operated in partnership with the British Business Bank and applications for a slice of an initial investment fund of £250,000,000 launched this month and remain upon until the end of September. Only unlisted UK companies who have raised a total of at least £250,000 from private third party investors in the last five years and who have a “substantive economic presence in the UK” will be eligible to apply for a loan under the new scheme.

Further details of the scheme are expected shortly but in the meantime, its expected key features and eligibility criteria are summarised below:

Matched Funding and Loan Size

A loan from the Government under the scheme will be unlocked if a company is able to secure other private investment and will then be given on a match funded basis. The loans will start at £125,000 and be capped at £5,000,000 and in any event, will represent no more than 50% of the total funding round with the balance being provided by the matched investors.

Term and Interest

The term of the loan will be no more than 36 months and upon its maturity, the Government will be owed interest at a minimum of 8% per annum (non-compounding) with such rate being increased if a higher rate was agreed with the matched investors.

Use of Proceeds

There will be a strict requirement for loan monies to be used solely for working capital purposes. Early guidance states that the loan must not be utilised to repay any borrowings or in distributions to shareholders or bonus payments to employees. In addition, no part of the Government’s money can be used to settle advisor’s fees in relation to the loan from the matched investors.


Going forwards, businesses able to attract future equity investment rounds may see the Government’s loan converting into equity at such time. Whether such conversion right is automatic or actioned at the election of a majority of the matched investors will depend on the level of future equity investment raised but in either case, there will be a minimum conversion discount of 20% as against the subscription price set by the company at the time of the relevant future funding round and this rate will increase in-line with any rights afforded to the matched investors.

On a sale or IPO, the Government’s loan will either convert into equity applying the same general conversion discount mentioned above or will be repaid with a redemption premium depending on which option creates the highest return for the Government.

At the end of the loan term, the default position will be that the Government’s loan converts and again, this would be in-line with the general conversion discount mechanism previously discussed. However, there will also be the option for the Government to request repayment at such time.

Warranties, Covenants and Transfer Rights

It is expected that only limited warranties will be required covering standard fundamentals such as title and ownership, capacity and compliance with law. In addition however, borrowers will be expected to warrant their eligibility to receive a loan under the scheme in accordance with the criteria previously referenced above.

Similarly, covenants should not be particularly onerous and will cover a general obligation to put the Government on a level playing field with the matched investors in terms of its general treatment and the provision of information rights going forwards.

Finally, in keeping with the typical position of a commercial lender, the Government will require general rights to transfer the loan and (following any conversion) its shares in the borrower. Institutional investors will be taking a close interest in the performance of the Future Fund going forwards and so it should be no surprise that the Government will require the right to offload it’s investments to interested parties accordingly going forwards.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.


Get in touch

If you have any questions relating to this article or have any corporate queries you would like to discuss, please contact Chris Dobson on [email protected]

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