The government has announced two new support packages aimed at helping companies driving innovation and development to continue to operate through the coronavirus outbreak.
Research and Development
The UK already has generous tax reliefs for companies carrying out Research and Development (R&D) activities, and has now announced an additional support package aimed to help Small and Medium sized businesses (SMEs) that focus on R&D. The chancellor has indicated that funding of £750 million will be available to qualifying businesses as a combination of grants and loans through the existing Innovate UK scheme.
The funding will predominantly be available to existing Innovate UK claimants, but the government are also aiming to offer funding to around 1,200 more businesses that are not currently in receipt of Innovate UK’s funding. Details on how to apply for innovation funding can be found here.
High Growth Start Ups
The chancellor has also earmarked an additional £250 million of funds to be loaned to high-growth firms as part the Future Fund. The fund will be launched in May and will provide UK companies with loans of between £125,000 - £5 million, with private investors at least matching the funding commitment from the government – meaning £500 million is on offer to qualifying businesses. The loans will convert into equity at the company’s next qualifying round of funding, and will either convert into equity or be repaid at the end of the loan (although with a high redemption premium attached).
To be eligible, business must be an unlisted UK registered company that has previously raised at least £250,000 of equity investment from third party investors in the last 5 years. Further eligibility criteria and details on how the scheme will be administered will be released in due course. It is likely that all UK start-ups should be able to benefit, and not just those currently in distress due to Covid-19.
Proposed headline terms suggest that:
- The loan will be unsecured bridging finance
- The government will fund up to 50%, with private investors providing the remaining funding
- The government funding must solely be used for working capital, and not to repay borrowings, pay dividends or bonuses
- The government will receive a minimum of 8% interest per annum, to be paid on maturity of the loan
- The maximum loan term will be 36 months
- The bridging loan will automatically convert into equity at the companies next “qualifying round of funding” at a minimum conversion discount of 20%
- “Qualifying round of funding” shall be when the company raises an amount of equity capital equal to at least the bridge funding
- On maturity (or sale or IPO), the loan shall either be repaid with a redemption premium of 100% of the bridge funding or covert to equity at a minimum conversion discount of 20%
Some of the terms may seem expensive, but the government have had to tread carefully with this proposal – whilst wanting to help start-up businesses, they must also protect the taxpayers funds. The current draft terms means that the government (and therefore ultimately, the taxpayer) will see increased rewards from those companies that excel post-pandemic, which will in theory, balance against the risks posed by the companies that unfortunately don’t fare so well.
We expect further information on the terms of the scheme to be released in due course, and will update our guidance as further details emerge.
