Additional Government loan package for companies affected by Covid-19

  • Written By: Joseph Sherry
  • Published: Mon, 27 Apr 2020 14:00 GMT

The Chancellor has announced a new support scheme for innovative businesses currently affected by COVID-19. It is aimed at businesses that are not eligible for existing rescue schemes, such as the Coronavirus Business Interruption Loan Scheme ‘CBILS’, and that have typically relied on equity investment.

Accounting And Regulary Service

The Government will invest a total of £1.25bn in eligible UK businesses as part of this new support scheme.

The new Future Fund supports high-growth companies by matching private sector money with Government-backed loans that can convert into equity.

The £500m co-investment fund will provide UK-based companies with between £125,000 and £5m from the Government, provided the cash is at least matched by investment from private investors. It is expected that this matched funding will have to be made using convertible loans, with the Government and private investors investing on the same terms. This should become clearer when the full details of the scheme are published. This could be an important consideration, as private investors investing in the business using convertible loan notes will not qualify for SEIS/EIS (Seed Enterprise Investment Scheme/Enterprise Investment Scheme) relief, based on the current rules. This is likely to make an investment from the Future Fund less attractive.

The Government’s loans will automatically convert into equity if the debt is not repaid within three years. The valuation of the start-up is not assessed as part of receiving a loan.

A further £750m will be available from Innovate UK, the national innovation agency, for smaller businesses focused on research and development. This support will be in the form of grants and loans, with the majority available to its existing business projects.

Which businesses are eligible?

The Future Fund scheme is open to unlisted, UK-registered companies that have raised at least £250,000 in equity investment in the past five years.
Additionally, any money put in by the Government must be matched by third-party investors and/or institutions.

What are the key terms of the convertible loans?

The loans are for a maximum period of three years and include the following conditions:

  • Loans must not constitute more than 50% of the funding being provided to the company, with the remaining amount provided by matched investor(s).
  • There is no cap on the amount that the matched investor(s) may loan to the company and therefore no cap on the aggregate funding being provided.
  • The funding must be used solely for working capital purposes and cannot be used to repay any borrowings, make any dividends or bonus payments. In addition, the portion provided by the Government cannot be used to pay any advisory or placement fees or bonuses to external advisers.
  • Loans incur interest at 8% per annum (non-compounding), to be paid on maturity of the loan. The interest rate will be higher if a higher rate is agreed between the company and the matched investors.
  • The Government can transfer their loan without restriction to an institutional investor, provided they acquire the Government’s interest in at least ten companies invested in by the Future Fund.

What happens if the loan is not repaid within 3 years?

If the money is not repaid, the Government will take an ownership stake in the company on the following terms:

  • The funding will automatically convert into equity at the company's next qualifying funding round, at a minimum conversion discount of 20% to the price set by that funding round. The discount rate will be higher if a higher rate is agreed between the company and the matched investors.
  • There will be a company repayment right in respect of the accrued interest.
  • The loan will convert into the most senior class of shares in the company.
  • If a further funding round is completed within six months of the relevant conversion event, the lenders are entitled to convert their shares into the most senior class of shares of the company in issue, following that round.
  • There is no valuation cap on the price at which the loan converts into equity on the company's next funding round. Where the matched investors have agreed a valuation cap with the company, the Government will be entitled to those same terms.
  • The Government can transfer any of its shares without restriction to an institutional investor, provided they acquire the Government’s interest in at least ten companies invested in by the Future Fund.
  • The Government is able to transfer any of its shares without restriction within the Government and to entities wholly owned by central Government departments.

This is a timely further boost for private companies that have been affected by COVID-19, but it has been suggested by some that it might not be a good use of taxpayers’ money. Successful businesses generating cash going forward are likely to repay the loans, with the Government only ending up with equity stakes in companies that are likely to fail.

When will payments start being made?

The application process will be launched in May and the Government expects first payments will be made by mid-May. The scheme will initially be open until the end of September 2020.

Further details on how the Future Fund will operate and how to apply for the scheme are expected in the coming days.

Government legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate advice from their financial adviser before making financial decisions. Correct at 27 April 2020. The Government’s guidance can be found here.



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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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