UK Government Covid-19 funding measures – what is available to Fintechs?
Latest update: 20 May 2020
As a global firm we have actively tracking and assessing the varied measures which have been made available by governments across the world to support corporates and businesses in response to the Covid-19 pandemic. Building on this work this is the first in a series of posts focusing on key Fintech jurisdictions: assessing what funding measures could be available specifically to Fintechs in the UK (from fully licensed digital banks, to payment and e-money providers and SMEs to start-ups).
Public support funding measures
The government has issued a series of public support funding measures since the start of the Covid-19 crisis in the UK, including the Covid-10 Corporate Financing Facility (CCFF) (read more), the Coronavirus Business Interruption Loan Scheme for SMEs (read more) (and a Large Business variation (read more)) and most recently its innovative start-up measures.
As a general matter, the financing facilities and loan schemes are designed to help the real economy – so non-financial corporates – and a number of criteria apply, varying from scheme to scheme which exclude many Fintechs. Firstly any Fintech which holds a banking licence or is an insurer will be generally excluded from all the government debt financing measures. Secondly those Fintechs which are regulated entities (for example as e-money institutions) other than banks and insurers are also clearly excluded from the CCFF (under which the government purchases commercial paper issued by investment grade, non-financial corporates) which excludes broadly any regulated entity or entity in a regulated group.
In practice, in respect of the CBILs and CBLILs even those Fintechs who are regulated as e-money issuers or payment services providers (so non-banks) or wholly unregulated (and are not thus excluded) will also likely not meet the eligibility criteria as borrowers if they are loss making, as is often the case with the fintech business model.
Measures for licensed banks
Although Fintechs with a banking licence are not eligible borrowers/ issuers under the public support schemes for corporates, the government and regulators have taken a separate set of measures to alleviate pressure from Covid-19 on banks:
- First, they can post collateral and get cash under the BoE’s liquidity facilities (the contingent term repo facility for short term funding and the term funding scheme for SMEs for long term funding).
- Secondly, the PRA and FCA have taken several regulatory measures to reduce the regulatory burden on banks in these stressful circumstances (e.g. postponing regulatory reporting and onsite inspections and regulatory change) and are taking a flexible approach to capital and liquidity buffers and the capital treatment of loans under payment moratoria and covenant breaches.
Innovative start-up funding measures
Otherwise the more recent innovative start-up measures may be of more interest as these are intended to plug the funding gap for genuine start-ups that are pre-profit and would generally be equity funded. These were announced on 20 April in the form of the “Future Fund”, a new scheme in partnership with the British Business Bank under which the government will issue £250 million worth of “bridge funding” in the form of convertible loans between £125,000 to £5 million to innovative, high growth VC-funded companies which are facing financing difficulties due to the coronavirus outbreak (read more).
Key aspects of the Future Fund scheme
The purpose of the Future Fund is to support businesses that have been unable to access other government business support programmes, such as CBILS, because they are either pre-revenue or pre-profit and typically rely on equity investment. Fintechs looking to take advantage of the Future Fund scheme should note the following:
- The scheme is open to UK unlisted limited companies incorporated before 31 December 2019 which have a substantive presence in the UK (with at least half of its employees being UK based and/or at least 50% of its revenues from UK sales).Borrowers need to demonstrate they have raised at least £250,000 in private funding over the last 5 years and have co-investors which can at least match the state-backed loans with private investment.
- The Future Fund opened for applications on 20 May 2020 on a first come first served basis and will initially be open until the end of September 2020.
- The application for funding must be made by the lead investor on behalf of itself, the investee company and the other investors and provides information about the investee company and the other investors.
- Investors must fall within prescribed categories of firms. If the borrower is a member of a corporate group, the application must be made on behalf of the ultimate parent company.
Details of the funding
- The funding takes the form of a convertible loan with a maturity of 3 years. Structuring as a convertible loan avoids having to assess the start-ups valuation during the crisis.
- The funding proceeds are intended to be used as working capital and must not be used to (i) repay any borrowings; (ii) pay any dividends; (iii) pay any bonuses; or (iv) pay any advisory fees.
- On maturity the loan shall either:
(i) be repaid by the company with a redemption premium (equal to 100% of the principal of the bridge funding); or
(ii) automatically convert into the most senior class of equity share at a 20 per cent discount to the valuation set in the borrower’s next funding round (assuming the borrower manages to secure funding at least equal to the amount of the bridge loan).
- The 20% discount on conversion would clearly be significantly dilutive for the existing shareholders and accordingly encourages repayment.
- Repayment terms are however onerous: the loans will attract interest at eight percent interest rate, which, unlike a bank loan, is payable together with repayment of 200% of the principal at the maturity date of 3 years.
Accessibility of the Future Fund to Fintechs
Given the relatively small amount of funding that is being made available through the Future Fund, the initiative seems to be aimed at the smaller end of the market. It may be relevant to angel/VC funded start-ups, including Fintechs, which would not be eligible borrowers under the other loan schemes.
The conversion and repayment terms attaching to the loans may make them unattractive to start-ups that have business models sufficiently robust to seek funding from alternative sources (e.g. their existing shareholders).
Smaller businesses focused on research and development can also apply grants and loans from Innovate UK, the national innovation agency for a new pot of £750m in grants and loans. The majority will be available to its 2,500 existing customers and the first payments being promised by mid-May.
According to the published Future Fund eligibility criteria, there are no exclusions for banks or other financial sector entities similar to the exclusions which apply to the CBILS/CLBILS. The focus of the scheme is on boosting innovation and bridging some of the Covid-19 funding gap for the 30,000 start-ups in the UK.
Given the relatively small pot of money available on a first come first served basis, how well the scheme manages to achieve this aim in the context of the fintech sector remains to be seen.