The Future Fund offers welcome relief to innovative businesses

The UK Government has pledged to make up to £250 million available to innovative companies facing financial hardship as a result of the Coronavirus crisis, with the prospect of increased funds if necessary. The new Future Fund scheme is welcome news to start-ups, many of which have not been able to benefit from the existing Government support schemes.

Alongside the Future Fund, £750 million of support for SMEs will be made available through Innovate UK's grants and loan scheme, with the first payments to be made by mid-May 2020.

Why is the scheme required?

The Government’s two existing support schemes for SME’s are the Small Business Grant Fund and the Business Interruption Loan Scheme operated by lenders (principally the major UK banks).

The Small Business Grant Fund provides relief on business rates charged on non-domestic properties. However, because start-ups often sublet property or operate from co-working spaces they are less likely to be eligible for the scheme than other SME’s.

To qualify for the Business Interruption Loan Scheme applicants must put forward a borrowing proposal to lenders that would be viable were it not for the coronavirus pandemic and demonstrate that the loan is affordable and that repayments would be made. This can prove difficult for start-ups, many of which are loss making initially.  

If start-ups fail to obtain funding and survive the Coronavirus pandemic, it will cause an innovation gap in industries including technology and life sciences. Countries such as France and Germany have already announced schemes intended to prevent start-ups from going insolvent because of the crisis. If the UK Government fails to provide adequate support there is a risk of setting the economy back in the innovation race. Widespread concern and intense lobbying from the start-up sector have exerted pressure on Government to come up with a more tailored plan.

What do we know so far?

The Future Fund is set to launch in May with the exact date still to be confirmed. We expect to see full details of the scheme made available over the coming weeks.

Matched funding required

The Future Fund will be delivered in partnership with the state-owned British Business Bank. It will provide eligible companies with unsecured bridge funding, with a minimum loan amount of £125,000 up to a maximum of £5 million. This is subject to at least equal matched funding from private investors. This bit is important as, for some start ups, securing these initial seed investors can be difficult in normal economic circumstances, let alone when the country is in lockdown during a global pandemic.

Use of funds

The convertible loan can only be used for working capital purposes. It cannot be used to repay any borrowings, pay dividends or bonuses to staff, management, shareholders or consultants or pay any fees or commissions of any external advisers in relation to the securing of this Government loan.

Interest payable - at least 8% per annum

The loan will incur interest at an annual rate of at least 8% per annum, which will be rolled up and paid on maturity of the loan or on its earlier repayment or conversion.  If the matched investors agree a higher rate of interest, then this will apply to the Government loan instead.  The interest will always be payable even if the principal sum is converted into equity.

Discounted conversion rates / 100% redemption premium

On the company’s next qualifying funding round the bridge funding will automatically convert into equity at a minimum conversion discount of 20% to the price set by that funding round. It is therefore possible for a higher discount to be negotiated. If this has been agreed with the matched investors then it will also be applied to the Government element of the funding. A qualifying round for these purposes will involve raising equity funding of at least the same as the amount invested under the Government loan and matching private investment (bridge funding). 

If the next fundraising is non-qualifying, (if the matched investors so elect), the bridge funding will convert at the agreed discount rate to the price set by that non-qualifying funding round.  So conversion in this case is a decision for the matched investors.

On a sale or IPO of the company, the loan will either convert into equity at the agreed discount rate to the price set by the most recent non-qualifying funding round (which will then be sold or admitted to trading as part of the IPO) or be repaid with a redemption premium of 100% of the principal amount of the bridge funding, whichever will provide the higher amount for the lenders. 

In the absences of a non-qualifying funding round after the date of the bridge funding but prior to the sale or IPO of the company, the loan will convert at the price per share calculated under the sale or IPO of the company – ie there is no discounted conversion rate in this case.


The Government element of the loan will mature after a maximum of 36 months.  It is possible for the matched investors to agree a term longer than 36 months.   On maturity, the matched investors can decide whether to call for the loan to be repaid together with a 100% redemption premium or to convert at the agreed discount to the most recent non-qualifying funding round.


Matched investors at this level are likely to be private individuals, many of whom would ordinarily be seeking tax reliefs for their investment under the Enterprise Investment Scheme (EIS).  If their matched investment is made by way of a loan on the same terms as the Government loan, EIS reliefs will not be available to them.  It is not clear from the detail we have so far if the matched investment is capable of being made by way of equity investment - perhaps not from the tone of what has been said.  However, if that were possible, then provided the company met the eligibility criteria for EIS and their matched investment were EIS qualifying, then such matched investors would be able to secure EIS reliefs on their matched investment.  This would certainly help the company to secure matched investors in order to access this Government loan.

EIS reliefs would not be relevant or available on the Government loan element of the bridge funding.

Who can apply?

The full eligibility criteria are still to be determined. However, we already know that:

  • companies will need to have already raised at least £250,000 in equity investment from third party investors during the last 5 years;
  • if a company is part of a group, it may not be eligible. Only a UK-based parent company can apply; and
  • companies will need to have a substantive economic presence in the UK, although there is no further guidance on what that might look like.

The application process will be subject to the company passing fraud, anti-money laundering and KYC checks.

If you would like further information on how the Future Fund scheme will work, and whether it is right for you, please get in touch.


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