Three year deadline looming for hundreds of firms backed by fund

In March 2020, then Chancellor Rishi Sunak launched a new convertible loan scheme for start-up businesses under the purview of the British Business Bank. 

The Future Fund allowed UK-based businesses to apply for a loan of between £125,000 and £5 million in order to support continued growth and innovation in sectors such as technology, life sciences and the creative industries. 

The government initially set aside £250 million available for investment through the scheme with the goal being that private investors such as venture capital funds, angel investors and regional funds, would at least match the government investment in these companies. 

The fund closed for new applications in 2021 after providing financing to 1,191 eligible businesses. As of June 30th 2023, just under 50% – 591, had completed the necessary additional fundraising and converted the loan including firms such as Zeelo, Hackajob and Dice.  

A further 51 exited the agreement and just over 10% – 129 – have gone into insolvency and closed. 

The remaining 35% – 420 – have loans that are approaching maturity or have already reached it. BBB has reached out to the founders reminding them that if they can’t convert the loan before the deadline then the Future Fund “will be electing for a repayment of the loan.”

It suggests founders should seek appropriate financial and legal advice if they are or expect to be unable to pay back. 

Mr Sunak said: “Our start-ups and innovative firms are one of our great economic strengths, and they will help spur our recovery from the pandemic. 

“The Future Fund will support firms across the UK to get through the pandemic by stimulating investment, so that they can continue to break new ground in technology and innovation.”

Like a lot of funding rounds for start-up businesses, the funding for the Future Fund would convert to equity in the business within three years allowing the BBB to purchase equity at a 20% discount when the note converted. 

Now this conversion deadline is looming for hundreds of businesses that took the funding. The terms of the agreement said that if the businesses failed to raise a priced round of funding before the date, they must repay the full amount plus a 100% redemption premium. 

So now many of these businesses must repay a bill that is double the amount originally borrowed. The British Business Bank said it is willing to extend the deadline for well-functioning businesses if they need additional time to complete a fresh round of fundraising but some startups say the conditions of this extension are onerous. 

One founder said: “as a deeptech startup with high upfront costs in a tough fundraising environment, we (founder and investors) were left with very few options for keeping the business alive. 

“We wanted to find a middle way between fundraising and insolvency but the loan meant it was no longer an option. It becomes a poison pill whereby any potentially positive outcome is poisoned by a really ugly balance sheet”. 

Investors may be happy to extend the note’s conversion date because they don’t want to put the company into administration or other insolvency process. They don’t expect convertible loans to be repaid because their aim is to keep their stake in the business. 

This was the scenario for this founder’s business whose investors were happy to extend the loan term however they say they found the BBB unwilling to engage in any other scenario planning except repayment. When this was impossible, the only way forward for his six year old business was liquidation. 

Possible extension – but at what cost?

A spokesperson for the BBB said that Future Fund loans were “market standard instruments and the commercial terms were benchmarked against industry norms before launch. Eligible borrowers can apply for a loan extension of up to two years.

“Where the extension application is from a company that has the support of other convertible loan agreement (CLA) lenders, is not in default of its obligations under the CLA agreement, passes our customer due diligence checks and is solvent, then the Future Fund will agree to an extension. 

“This is true for almost all applications.”

The experience of some founders is mixed. 

Some companies that have been backed by reputable venture capital (VC) firms with a track record will have a better chance of an extension but companies that have raised money from angel investors or family offices are finding it harder.

The BBB doesn’t disclose how many companies have asked for an extension and how many have been granted but a guidance note from another advisory consultancy clearly states that an extension is “very much at the discretion of the Future Fund and is subject a number of conditions and requires you to act fast in applying for any such extension.”

Some entrepreneurs may consider it ironic that the fund was set up to save technology companies and fledgling start ups yet, like as we’ve seen with the bounce back loan scheme, it’s this very debt that means many have to look to insolvency to survive, or close and begin again.

What can sometimes seem like a blessing can end up being one of the biggest problems a business can face. 

Three years after the pandemic and one set of economic issues look to have been replaced by different and equally problematic set. 

High inflation, rising interest rates, increasing energy bills for businesses and a generally tough economic landscape mean that many otherwise viable businesses are struggling to pay ongoing debt such as a bounce back loans or in the case of the future fund loan – the entire amount and a 100% premium on top. 

Which is why you should find out what options you have to improve your company’s prospects right now – before external circumstances get even harder. 

We offer a free initial consultation for any business owner or director that wants one – at a convenient time for them. 

One of our advisors will work with them to outline what options they have – right now – and what concrete steps they can take right now to get closer to their goals. 

But they should act quickly – the sooner they get in touch, the more choices they generally find they have.