Corporate finance and tax experts are warning start-up businesses to be aware of the full implications of securing investment via the new Future Fund, as it opens for applications.
The scheme was launched to support innovative companies facing financial difficulties due to the coronavirus crisis. It sees the Government match fund convertible loans of £125k to £5 million, with the loans converting into shares in the company if not repaid after three years, or in the event of an exit or new funding round. The fund is administered by the British Business Bank and opened for applications yesterday (May 20).
Richard Wadman, corporate finance director at chartered accountant and business adviser PKF Francis Clark, believes the scheme will help some young companies to continue their development and growth but says entrepreneurs should go into it with their eyes open.
“Since the Future Fund was announced a month ago, we’ve been speaking to clients interested in this potential source of funding,” he said. “While it’s a welcome initiative that will suit some businesses which can’t access other support programmes because they are pre-revenue or pre-profit, it won’t be a panacea for all those in need of finance.
“To qualify, a business must have raised at least £250k in equity investment in the last five years, which is going to be a barrier for lots of early stage, high growth companies. Business owners who meet the eligibility criteria should first consider whether there are other ways of raising the funding they need more cheaply or without diluting their shareholdings.
“The Future Fund application process is investor-led, so relies on a business having an investor or investors lined up who can take responsibility for applying, as the scheme does not offer a matchmaking service.”
Companies also need to bear in mind the tax implications of obtaining investment via the Future Fund.
Corporate tax partner Holly Bedford said: “Many early stage companies attract external investors with tax breaks through the Enterprise Investment Scheme or Seed Enterprise Investment Scheme. The Future Fund will not qualify for these reliefs, so the new private investors will need to be prepared to invest without these tax incentives.
“Care will also need to be taken if and when Future Fund loans convert into equity, as in some circumstances the debtor company could be taxed on the amount of the loan released. The British Business Bank is therefore right in strongly recommending that companies and investors seek their own tax advice before entering into a convertible loan agreement.”
Other options for high growth, innovative businesses to consider include angel investors and crowdfunding.
Wadman added: “Investment from the crowd or business angels may be more attractive and easier to secure than Future Fund convertible loans. For businesses at the research and development stage, there are also R&D tax credits or grants and loans administered by Innovate UK and others.”
More information can be found at pkf-francisclark.co.uk/coronavirus-updates.