UK Government Covid-19 funding measures – what is available to Fintechs?

https://www.linklaters.com/en/insights/blogs/fintechlinks/2020/may/government-covid19-funding-measures/united-kingdom
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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:

  1. 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).
  2. 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 “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 registered, unlisted firms which have a substantive presence in the UK. 
  • 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 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. 
  • 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, 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). 

As the full eligibility criteria have not yet been published it is unclear whether there will be any exclusions for banks or other financial sector entities similar to the CBILS/CLBILS. At this stage, there are no such exclusions and it appears that the apparent purpose of this scheme is to boost innovation. 

The Future Fund will launch for applications in May 2020 and will initially be open until the end of September 2020.

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.

We will update you as more details become available.

https://www.linklaters.com/en/insights/blogs/fintechlinks/2020/may/government-covid19-funding-measures/united-kingdom