Charity enterprise Q&A: Social investment
Social investment can help charities develop their trading activities, but can be inaccessible and unaffordable for some. Access Foundation CEO Seb Elsworth explains how the industry is changing and what opportunities exist today.
Q: How can social investors help charities to develop new income streams through trading?
A: The best thing that social investors can do is to provide a wide range of financing tools to meet the needs of the charity or social enterprise where they are at in their journey, rather than offering fixed take-it-or-leave-it products.
These include grants or, in some cases, referring to other grant providers to facilitate business planning. Many are doing this already, for example, by offering a grant via the Reach Fund. It also means that social investors need to continue to seek to offer more flexible forms of loans.
But the right sort of financial support is only part of the picture. Developing trading income is a big cultural shift for the sector and for individual organisations, and the role of umbrella bodies and other networks is key in this. For example Homeless Link is part of the Enterprise Development Programme, which offers peer support and learning opportunities as well as grants within the homelessness sector to support the development of enterprise models.
Q: Some complain that it’s hard to raise finance for enterprises that aren’t property-backed. Is social investment fit for purpose?
A: This view would have been accurate four or five years ago, but a lot has been changing. Social investors have recognised the need for more unsecured lending (which doesn’t require a building or any other asset which the lender can repossess if the loan isn’t repaid), and many new funds offer simple loans like this to charities and social enterprises.
Loans are offered at a range of different sizes and, depending on how the social investor themselves is funded, can be anything from less than £10k to £3m or more. Social investors which are funded through the Growth Fund offer loans of less than £150k. Other lenders, like Social and Sustainable Capital’s Third Sector Investment Fund, offer larger loans and finance for payment by results contracts.
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However, it is true that social investors are not always able to meet the varied demand for finance. Loans are sometimes too short in their repayment terms, or don’t allow for income to be grown slowly over a long period of time. The development of more flexible investment products, sometimes called “quasi-equity”, is a big priority for social investors. To meet this need, social investors need to be able to access more flexible sources of finance themselves. Access is one of a number of organisations seeking to address this.
Q: The new Enterprise Development Programme, funded by Access, aims to enable charities to develop more trading activity. What sort of organisations will you support?
A: We have begun the Enterprise Development Programme focusing on two specific sub-sectors, youth and homelessness, because we saw that these were two sectors which had significant latent potential to develop earned income models. However, we will be expanding the programme beyond those two sub-sectors over this year.
We don’t have any firm views on the sort of enterprise models which we want to back. A big part of our goal is to encourage a more entrepreneurial mindset in the way charities are run, as much as developing new models from scratch. We do not have any restrictions on the size of organisations we support, but the median turnover of organisations which have received investments through our Growth Fund is £250k; so, contrary to some perceptions in the sector, this is not just something for larger organisations.
A big part of our work is also focused on developing a better knowledge base around the sorts of models which are actually working, and for whom, so that others can learn from them. We do know there are some which many have tried and few have made profitable, like community cafes. Less reinventing the wheel is a key goal too.
Q: Trading is a new area for many people in the third sector. What tips would you give to a charity considering setting up a trading arm?
There is a tendency to see the transition to a more enterprising model as a wholesale change in the income model for an organisation; as “we are not going to receive any grants any more and therefore we will learn all our income from trading activity”. This is very rarely the case.
We see the transition as being more about encouraging a culture of enterprise rather than rushing straightaway to define a new product you can put a price on. It’s about thinking about what you already do, and are good at, and thinking creatively about who that delivers value for and who might want to pay for it.
Specifically in terms of setting up a trading arm, I have seen charities rush to create a subsidiary company and put in place detailed governance arrangements around it, before they are clear what it will do. This may be because those involved are more comfortable navigating charity governance issues than being enterprising. In my experience, governance form should follow function. You may well need a trading subsidiary, but wait until you are clear why before you set up structures which are hard to change later.