Future Fund Convertible Loan Agreement Explained: All You Need to Know
If you`re a startup or a small business looking for funding opportunities, you may have heard about the Future Fund Convertible Loan Agreement (CCLA). This funding option, established by the United Kingdom government in 2020, aims to support high-growth companies affected by the COVID-19 pandemic. In this article, we`ll break down what a CCLA is, how it works, and what benefits and drawbacks it may have for your business.
What is a Future Fund Convertible Loan Agreement?
A CCLA is a financial instrument that allows eligible companies to access a loan from the Future Fund. Unlike traditional loans, a CCLA has features of both debt and equity financing. Specifically, a CCLA is a convertible loan, meaning that it can be converted into equity (shares in your company) at a later stage, usually during a funding round. This means that the Future Fund becomes a shareholder in your company, owning a percentage of equity, in exchange for the loan.
How does a Future Fund Convertible Loan Agreement work?
To apply for a CCLA, your company must meet certain criteria:
– Be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third-party investors in the last five years
– Have a substantive economic presence in the UK (meaning that at least half of your employees or revenues are based in the UK)
– Not have any of its shares traded on a regulated market, multilateral trading facility, or other listing venue
– Be able to attract at least equal match funding from private investors and/or venture capital firms
– Demonstrate that the funds will be used to support your operating costs and sustain or grow your business
If your company qualifies, you can apply for a CCLA through an online portal. The loan amount can range from £125,000 to £5 million, with interest accruing at 8% per annum. You have five years to repay the loan or convert it into equity, whichever happens first. If you choose to convert the loan, the conversion price will be determined by the valuation of your company in the next equity funding round, with a minimum discount of 20% to the price per share.
What are the benefits of a Future Fund Convertible Loan Agreement?
For startups and small businesses, a CCLA can offer several advantages over other funding options:
– Easier access to funding: As the loan is backed by the government, it can be easier to obtain than other types of financing, especially during economic downturns or uncertain times like the COVID-19 pandemic.
– Flexible repayment terms: Unlike traditional loans, a CCLA doesn`t require immediate repayment or fixed monthly payments. You can choose to repay the loan or convert it into equity at your own pace, giving you more control over your cash flow.
– Reduced dilution: By using a convertible loan instead of equity financing, you can delay the dilution of your ownership and control in your company until a future funding round. Moreover, if the valuation of your company increases significantly, you may be able to repay the loan with less equity, reducing the dilution even further.
– Access to experienced investors: As the Future Fund becomes a shareholder in your company, you can tap into their networks and expertise, potentially opening doors to new customers, partners, or investors.
What are the drawbacks of a Future Fund Convertible Loan Agreement?
However, there are also some drawbacks to consider before choosing a CCLA:
– Higher interest rate: Although 8% per annum may seem low compared to other types of loans, it is still higher than the cost of equity financing. Moreover, if you choose to repay the loan instead of converting it, you`ll have to pay it back with interest, which can be a burden on your cash flow.
– Uncertain valuation: As the conversion price is determined by the next funding round, you may not know the exact value of your company at the time of conversion. This can lead to disagreements or negotiations with the Future Fund or other investors, potentially delaying the conversion or reducing its value.
– Loss of control: By accepting the Future Fund as a shareholder, you may lose some control over your company`s decisions, especially if they have a significant stake or veto rights over certain matters. Moreover, if you fail to repay the loan or convert it, the Future Fund may have the right to enforce security over your assets or take a share of your business.
Conclusion
In summary, a Future Fund Convertible Loan Agreement can be a valuable funding option for startups and small businesses that meet the eligibility criteria. By combining the flexibility of a loan with the potential upside of equity financing, a CCLA can provide much-needed cash flow and growth opportunities. However, it`s important to weigh the benefits and drawbacks carefully before applying for a CCLA, and to seek professional advice from a lawyer or accountant. With the right strategy and execution, a CCLA can be a stepping stone towards a successful future for your business.