Paul Scullion: Government COVID-19 support for early-stage and high-growth businesses
Paul Scullion, senior associate in the corporate financial team at Burness Paull, discusses government support for early-stage and high-growth businesses.
A recurring theme in response to the various coronavirus-related financial support measures announced by the UK and Scottish Governments thus far has been a criticism that not enough was being done to support earlier-stage / high-growth businesses.
Many such businesses were likely to find themselves precluded from the previously-announced support measures (such as the CBILS scheme), as they typically lack the size and trading history to attract bank funding. This has placed an increasingly heavy burden on existing directors and shareholders to plug funding requirements.
In the past few days, both Westminster and Holyrood have taken action to try and address this.
The approach of the UK government is twofold:
- Firstly, they announced a £750 million expansion of Innovate UK’s funding for small and medium-sized businesses focusing on research and development (and likely therefore to predominate in the life sciences and tech sectors). This will comprise both grants and loans, and while the lion’s share will be reserved for companies who are already receiving Innovate UK funding, encouragingly over £200 million will be offered to new businesses.
- Secondly, they have unveiled a new “Future Fund” (initially up to £250m), to be administered by the British Business Bank. This fund will invest between £125k and £5m (by way of unsecured convertible loans) into high-growth companies in the UK who meet the following criteria (it remains to be seen whether other conditions for eligibility will be introduced):
- The investment will be made on a matched basis with private sector investment, with up to 50% coming from the Future Fund. This is therefore an addition to private sector funding, not an alternative to it, and so the onus will very much remain on businesses to seek and secure investment from the private sector (whether existing and/or new investors) before turning to the Future Fund.
- In the past five years, the company must have raised at least £250,000 from third-party investors (excluding any of the above private sector funding). This will preclude many very early-stage businesses and those who have never fundraised before.
- The company must be an unlisted UK registered company (if the company is a member of a corporate group, only the ultimate parent company, if a UK registered company, is eligible to receive the loan).
- The company will be subject to KYC and anti-money laundering checks – whilst this is to be expected, it remains to be seen what information and documentation will need to be provided, and how quickly and easily that can be done in the current climate.
Since as noted above the government funding will match private sector investment, many of the commercial terms of the convertible loans will be driven by the private investor(s). The Treasury has however published guidance on the minimum terms that it will insist upon. These include a maximum 3-year repayment term, an interest rate of at least 8%, and a 20% conversion discount at the next funding round. The Future Fund will initially be open until the end of September.
Additionally and separately, the Scottish Government has announced a £100m fund to provide financial support to “viable micro and SME businesses” and the newly self-employed who are suffering COVID-related financial distress. This fund will be managed through local authorities and enterprise agencies and is aimed at businesses who are ineligible for other Scottish Government or UK Government schemes (it is hoped – but not yet confirmed – that this will include businesses who fail to qualify for the above UK Government schemes). The Scottish Government has said that applications for this new fund will be available by the end of April.
In an additional development, the UK Government last night announced a new “business support finder” tool, to help businesses find out which financial support measures are available to them during the pandemic. This can be found here and it is hoped that this will bring simplification and clarification to the financial support process for business owners.
Whilst - as with all the other coronavirus-related support measures – the devil will very much be in the detail, the headlines are positive for younger businesses with growth aspirations facing cashflow and funding crises as a result of the pandemic. We eagerly await further information and clarification on how these schemes will operate.
- Read all of our articles relating to COVID-19 here.