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Extension of coronavirus loan scheme does little for startups, says Tech Nation

Changes to the government’s coronavirus business loan scheme will do little to alleviate the financial pressure on startups and pre-revenue companies, despite previous warnings from tech industry bodies about the dangers they face

Chancellor Rishi Sunak is extending the Covid-19 coronavirus loan scheme to all viable small and medium-sized enterprises (SMEs) that have faced financial difficulty during the Covid-19 pandemic, but the changes will offer little help to tech startups, according to entrepreneurial network Tech Nation.

Under the Coronavirus Business Interruption Loans Scheme (CBILS), companies with a turnover of up to £45m can apply for a loan of up to £5m, which will be interest-free for a year and have the risk underwritten by the Treasury.

Initially, companies had to prove they were unable to get loans on commercial terms, but now Sunak has scrapped the condition to allow more businesses to apply for help.

However, the liquidity needs of early-stage, pre-revenue tech companies are still yet to be met, as they lack the trading history for banks to consider them “viable” propositions, according to Tech Nation, which is now calling for fully backed government loans or convertible notes to provide much-needed investment for these companies.

“Nearly all businesses we speak to would welcome a cash injection due to cashflow issues. While many tech scale-ups are cutting costs and conserving cash, many are in the middle of raising more funding, which we’re already seeing signs of slowing down,” said Tech Nation chief executive Gerard Grech.

“Companies also want to minimise furloughing – losing staff would mean losing momentum and competitive advantage to domestic and international talent markets and competitors. An intervention is hard to target correctly and the government has done well to launch CBILS so quickly. What is needed now are some more detailed, targeted interventions in the tech sector.”

On top of backed government loans, Tech Nation is also calling for an acceleration of research and development (R&D) tax credits so that pre-revenue companies can access the finance to alleviate any cashflow problems.

A generation of startups could be ‘wiped out’

Seven tech industry bodies – including Tech Nation, the Coalition for a Digital Economy (Coadec) and TechUK – have previously warned Sunak that a generation of tech startups could be “wiped out” if they were not given adequate support during the pandemic.

In a letter to the Chancellor on 2 April, the groups said a £300m “runway fund”, invested through the British Business Bank, was necessary to protect “the future of British innovation”. The fund would give the bank equity in the startups, meaning that the government could potentially make a profit from bailing them out.

In a separate letter from coworking and innovation space company Plexal, signed 24 March, managing director Andrew Roughan complained that the Chancellor’s funding distribution mechanisms could deprive nearly 650,000 small businesses of grant funding.

“The proposed plan is that companies eligible for small business rates relief can receive grant funding through their local authority,” said Roughan.

“The issue is that members of coworking spaces are not registered for small business rates relief. Business rates are paid by the coworking space and payment is bundled into membership fees. As such, some coworking space members are not recognised by their local authority and have no means of accessing the grant funding.”

He added that 70 of Plexal’s 123 member companies would not be able to access grant funding if the distribution mechanism was not reviewed.

However, Sunak’s latest measures have not changed the mechanism, leading Tech Nation to call for coworking spaces to be reclassified as “hospitality” venues.

“One of the UK tech sector’s greatest assets is its network of over 260 coworking spaces across the country. Coworking spaces are key to facilitating access to capital, community and customers, and provide the vital flexibility needed for innovative startups to scale,” said Grech.

“Many coworking spaces fall between the gaps of the government support outlined so far, and are losing members who can no longer pay the rent and are unable to generate profit through events. These smaller coworking spaces should be temporarily reclassified as hospitality venues to qualify for small business rates relief.”

Roughan added that while the new economic package could help a lot of businesses, startups would still miss out on crucial grant funding.

“It is incumbent on government to provide appropriate support for the companies that fall into this loophole, or risk losing a generation of entrepreneurial innovation that will underpin our digital economy in the years to come,” he said.

“Small and medium-sized businesses make up most of this country’s economy, and we need the next generation of entrepreneurs to come out fighting on the other side of this crisis”
Jonathan Townsend, Prince’s Trust

A survey of the Tech London Advocates’ network, which has 10,000 members, also showed how much of a threat the current pandemic is to startups.

Out of those who responded, 49% see the coronavirus outbreak as an existential threat, while 53% are reorienting their next quarter’s business models around survivability. Some 32% expect business to stagnate in that period.

“We don’t know when we are going to get through this situation, so everything is about ensuring they can operate in the coming months so their businesses are viable when we emerge from this challenging period,” said Tech London Advocates founder Russ Shaw.

In response to the threat, the Prince’s Trust and NatWest launched an Enterprise Relief Fund on 3 April worth £5m to help entrepreneurs keep their businesses afloat.

To apply for grants from the fund, as well as the one-to-one business support and guidance being offered, the business must have been set up in the past four years and run by someone aged 18 to 30.

Those who are in the process of starting a business and don’t have any other source of income during the crisis are also eligible to apply for a grant.

“It is more important than ever to encourage and protect the entrepreneurial spirit of young people in the UK. Small and medium-sized businesses make up most of this country’s economy, and we need the next generation of entrepreneurs to come out fighting on the other side of this crisis,” said Jonathan Townsend, interim chief executive of the Prince’s Trust.

“The challenge, in the short term, is that many young entrepreneurs whose business models are ordinarily completely viable are now suffering a considerable loss of income during this unprecedented economic time.”

More than £90m of loans to nearly 1,000 SMEs have been approved under CBILS since its launch on 23 March, while a government-backed scheme to give financing to larger companies, operated by the Bank of England, has provided almost £1.9bn of support to firms, with a further £1.6bn committed.

Read more about the government’s response to Covid-19

  • The government has outlined new emergency powers to contain the spread of the Covid-19 coronavirus, which includes relaxing restrictions on mass state surveillance.
  • In a letter with more than 100 co-signatories, Labour MP Chi Onwurah calls for politicians to lead by example during the coronavirus outbreak.
  • In the past couple of weeks, nearly a million people have signed up for Universal Credit as a result of the Covid-19 coronavirus crisis. Never has the UK government’s move to a digital-first world faced a greater examination.

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