Image of Amir Rizwan

Amir Rizwan

Investment Manager

Charities Aid Foundation

NINE MYTHS ABOUT SOCIAL INVESTMENT

12 November 2014

myths-facts

There’s a lot of debate about social investment at the moment – is it right or wrong for charities and not-for-profits to borrow money to help growth?

We try to bust nine of the myths about social investment:

1. Social investment is a form of income for charities

Social investment is not a replacement for income as it will eventually need to be repaid. Your organisation’s plan for growth should consider a variety of funding sources to complement your income and ensure you are not always reliant on a single source of revenue.

2. LOANS ARE RISKY FOR CHARITIES

Loans are only risky if directors, trustees and others involved in the decision-making do not carry out the due diligence involved. Can we afford the upfront fees? Can we afford the monthly payments now, and in a few years time?

Research suggests that many organisations actually benefit in the long run from going through the process of taking out finance, as it can lead to improvements in governance, internal management structures and financial discipline.

3. SOCIAL INVESTMENT IS RIGID AND OFFERS LITTLE FLEXIBILITY

Actually, social investment can be one of the most flexible financing options available to charities. There are a variety of ways to structure the loan, and many providers offer a completely bespoke approach ensuring that the borrower’s needs are at the heart of the process. For example, a deal could combine a number of elements, such as an unsecured loan, a standby facility to manage cash flow and a capital repayment holiday to assist in the short term.

4. LOAN FINANCE IS UNAFFORDABLE

Whilst lending money to charities and not-for-profits may seem like an anathema to some, for a lot of organisations it offers a chance to borrow money at more favourable rates. Social investors, unlike banks, are more willing to take on higher risks in order to generate positive social impact.

You should speak to as many providers as possible in order to find out which option best serves your needs.

"Social investors, unlike banks, are more willing to take on higher risks in order to generate positive social impact"

5. IT IS COMPLEX AND DIFFICULT TO UNDERSTAND

There's a huge range of guidance out there to help organisations uncover the potential of social investment. A website like Good Finance offers a breakdown of the various organisations who operate in this space and what they offer.

Whilst there's been a lot of innovation in the market (for instance the creation of Social Impact Bonds), the majority of financing is made up of standard term loans. We produced a research paper 'In Demand: the changing need for repayable finance in the charity sector' which talks about the demand we see for financing from social organisations.

6. THE SOCIAL INVESTMENT SECTOR IS NEW

The social investment market as we know it today has been around for at least 15 years, but some of the first pioneers in this area were actually religious institutions – the Quaker and Methodist churches can trace their involvement back to the 1700s!

7. IT'S ONLY SUITED TO LARGE ORGANISATIONS WITH SIGINIFICANT FINANCIAL RESOURCE

From local community organisations to large UK-wide charities, social finance could be of benefit to organisations with varying degrees of resources. The beauty of the social investment market is the diversity of the options available, allowing many more organisations to access financial support without a large amount of security.

8. THE INVESTMENT PROCESS IS BURDENSOME

Whilst social investment providers have both an ethical and financial obligation to ensure that the necessary due diligence is carried out, many providers do try and make the process as easy as possible for applicants.

Paperless applications and dedicated investment experts will help support applicants through every step of the process, often writing the application on behalf of their clients, in order to make the process as quick and smooth as possible.

9. THE MARKET IS FOCUSED ON LONDON

Too often the view of social investment is that it is too London-centric with little capital available for other parts of the UK. While it's true that the majority of money lent so far has been concentrated in the South East, the emergence of regional funds aims to correct the imbalance. Developments such as the SIB Community Investment Fund and the growth of Key Fund across the North East mean that social organisations based around the UK will find it easier to tap into capital.

The growth of Local Economic Partnerships across the UK will provide a further catalyst in the spread of capital available for social organisations.

"CAF Venturesome has been financing social organisations for 15 years, making us one of the pioneers of the social investment sector. To date we have lent over £42 million to allow 500 social organisations to build capacity and resilience."

If you’re interested in social investment and want to see if you’re eligible through CAF Venturesome
get in touch with the CAF Venturesome team.

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