Convertible Loans: The 'Future Fund' Scheme

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A UK government-backed convertible loan scheme launched in 2020 to support innovative, equity-dependent companies impacted by COVID-19 through matched funding and equity conversion mechanisms.
What are the main aims and objectives?

The Future Fund aims to sustain innovative UK-based businesses negatively impacted by the COVID-19 pandemic that generate little or no revenue and rely on equity finance. It provides short-term financial bridging through convertible loans to preserve company continuity, catalyze private investment through a mandatory 1:1 match, and protect long-term UK innovation capacity. The scheme addresses a critical gap in support for high-growth firms ineligible for conventional loans, maintaining employment and fostering post-pandemic economic recovery and competitiveness.

How does the program work?

The Future Fund delivers unsecured convertible loans to eligible companies facing pandemic-related financial challenges, with loan sizes from £125,000 to £5 million, subject to matched investment from private investors at 1:1 ratio. The application is investor-led, requiring private investors to commit funds matched by government contributions. Loans bear an 8% interest rate over a maximum 36-month maturity, after which loans convert to equity upon a qualifying financing or exit event, or become repayable with a punitive 100% redemption premium if no conversion occurs. Standardized convertible loan agreements with most-favored-nation clauses ensure uniform terms and protect government interests.​

Applicants must be UK-incorporated, innovation-driven and generally pre-revenue or early-stage firms unable to access traditional lending. The scheme was open from May 2020 to January 2021, processing applications on a first-come, first-served basis. Post-maturity, companies facing repayment obligations could seek loan extensions of up to two years, albeit with higher interest terms, to mitigate insolvency risks.​

The British Business Bank administers the scheme, handling application assessment, disbursement, and ongoing portfolio management, including equity conversion and maturity management activities. The Future Fund helped catalyze nearly £2.28 billion (public and private combined) into innovative UK firms across sectors and geography, with high uptake demonstrating strong unmet financing demand in the startup ecosystem.

What is the overall cost?

The UK government allocated £250 million (~USD 330–350 million) initially to the Future Fund. The matched private investment doubled total funding deployed to approximately £2.28 billion (~USD 3.00–3.20 billion). By scheme close in January 2021, £1.14 billion had been disbursed across 1,191 companies. Cost of managing the scheme, including administrative overheads and maturity management, amounted to approximately 5% of funds, or £50–60 million (~USD 65–80 million).

How was it implemented?

The Future Fund was announced by Chancellor Rishi Sunak on April 20, 2020, devised rapidly to fill the financing gap for innovative firms excluded from traditional COVID-19 loan schemes due to equity dependence and revenue profiles. Following finalization of eligibility, terms, and investor-match requirements, the scheme opened for applications on May 20, 2020.​

Administered by the British Business Bank, the program was rolled out nationwide with clear application guidelines and a standardized convertible loan agreement framework to expedite processing and ensure contract uniformity. Over 1,191 companies received funding by program close (January 2021), with loans tailored for working capital through convertible structures to align public support with company success.​

From 2021 onward, British Business Bank focused on portfolio management, facilitating loan conversions to equity, negotiating extensions, and managing insolvency risks as loans matured. The scheme drew on learnings from previous accelerator and innovation finance programs to optimize delivery mechanisms.

What impact has been measured?

he Future Fund delivered significant short-term financing relief and fostered private sector investment in innovative UK companies during the pandemic. It supported 1,191 companies, disbursing over £1.14 billion with private match equaling government funding. Roughly 58% of companies converted loans to equity by January 2024, with 14.5% entering insolvency.

What lessons can be learned?

Based on the Year 3: Future Fund Evaluation Report (September 2025), the conclusions and learnings are summarized as follows:

Overall Impact and Success

  • Stabilization during Crisis: The Future Fund successfully bridged a critical financing gap for early-stage, equity-backed firms during the Covid-19 pandemic. It boosted investor confidence and helped preserve the UK’s innovation pipeline.
  • Survival: The Fund reduced short-term closure risks. Approximately 70% of surveyed portfolio firms stated they would have closed within 12–36 months without this support.
  • Mobilizing Capital: The co-investment model effectively mobilized private capital without displacing it; nearly 50% of recipients secured follow-on funding.
  • High-Growth Outliers: A small group of top-performing portfolio firms (mostly in IT and software sectors in London/South East) grew approximately eight times faster than the counterfactual group.

Challenges and Long-Term Uncertainties

  • Convergence of Performance: While portfolio firms initially outperformed counterfactuals in fundraising, valuations, and turnover growth (2020–2022), performance metrics converged by 2024 due to market volatility, inflation, and rising interest rates.
  • Survival Rates: By 2024, counterfactual firms actually had slightly higher survival rates (80% vs. 75%). This suggests alternative finance strategies might have supported greater long-term resilience for some businesses.
  • Insolvency Risks: The reliance on Convertible Loan Agreements (CLAs) increased liquidation risks. Some firms struggled with conversion deadlines and the 100% redemption premium, leading to financial distress. Recoveries from insolvencies were minimal because the loans were unsecured.
  • Regional and Gender Disparities: Investment remained concentrated in London and the South East, and gender representation among recipients was slightly lower than in the counterfactual group (though addressing these disparities was not a core objective of the Fund).

Lessons for Future Policy

  • Flexibility vs. Safeguards: The CLA structure provided necessary speed but lacked flexibility for sectors with long development cycles (e.g., deep tech, life sciences). Future schemes should balance flexibility with safeguards to prevent "zombie companies" while accommodating sector-specific needs.
  • Complexity Barriers: The complexity of the CLA deterred some eligible firms, particularly those without legal expertise.
  • Financial Literacy: Future interventions should include financial literacy support to ensure recipients can manage funding and repayment obligations effectively.
  • Long-Term Support: Short-term stabilization is insufficient for long-term growth. Sustained policy interventions are needed to support high-growth companies beyond crisis periods, addressing persistent funding gaps in the broader innovation ecosystem.
Notes + Additional Context

This relief package targeted to start-ups emerged after CEOs of some of the country’s top tech companies urged the government to extend its coronavirus relief measures to start-ups. They have pointed out to the financial support tech entrepreneurs received in France and Germany (4 billion euros and 2 billion euros, in relief funds respectively). 

Furthermore, these advocates pointed out that many young tech firms had not been able to access existing emergency funds set aside for small businesses because they were unable to meet the criterion of showing profits have been affected by COVID-19. It is common and acceptable that innovative, growth-oriented companies, such as venture capital-backed tech companies, prioritize growth over profitability in their early stages. As a result, the criteria for applying for the Coronavirus Business Interruption Loan Scheme shut off companies without a history of consistent profits. 

CURATED BY

Cristina Fernandez

Director for Knowledge + Programming
Global Entrepreneurship Network
United States