Some want to believe 2017 is the year social investment will go mainstream. Yet there is still limited knowledge about what it is and what it can do for a charity or social enterprise.
Many organisations are unnecessarily wary of social investment, and as a result overlook its potential benefits. These three funding challenges will be familiar to many charities and social enterprises.
CHALLENGES FACED BY CHARITABLE ORGANISATIONS:
- Buying a building or fixed asset. Typically, this can be met by a long-term mortgage or secured loan from the bank, but this can’t be relied upon, especially as the banks become increasingly cautious with their lending. Furthermore, there is the potential reluctance of banks to lend the entire amount of loan capital for this, which can sometimes lead to a funding gap.
- When a grant is being paid in arrears and there isn’t enough cash to cover day-to-day costs ahead of receiving it. You might try to speak to the bank about a loan to bridge to the grant payment – but this is often met with little success if the organisation has no security to offer.
- You have an ambitious growth plan which is likely to diversify and increase income, but it requires investment upfront. Many organisations struggle to raise this finance, often due to the high level of financial risk of supporting such plans.
HOW SOCIAL INVESTMENT CAN HELP:
- By weighing financial return against social impact, it makes finance available for charities and social enterprises to meet their needs, and can come in several forms, including unsecured loans, lines of credit, and equity-like instruments – but not grants.
- Social investors make capital available to charities and social enterprises that are unable to secure borrowing from traditional sources due to their risk and the fact that they do not have any security.
- Social investment has developed in response to charities and social enterprises requiring capital for a variety of financing needs including: reserves to give financial resilience; to acquire fixed assets; as working capital to manage timing differences between spending money and receiving it (cash flow); and as development capital to fund the costs of growth, development and innovation.
Social investment is not, however, a magic bullet. Its role is to support charities seeking to align expenditure with income; not to encourage the charity sector to run up debts in the struggle to cope with local authority funding cuts and reductions in fundraising income.
Capital is no substitute for revenue, and charities cannot function without both. Whilst seeking to raise funds for specific projects, charities must not forget to strengthen their balance sheets and to ensure the robustness of their long-term finances. However, in reality few charities have been able to create a surplus with which to build reserves and achieve this.
Perhaps one of the most useful types of funding social investment can offer is an unsecured working capital loan, which can be used to smooth short-term cash flow fluctuations in advance of a committed payment. This type of bridging facility is particularly useful for charities that have low reserves and are being paid by a grantmaker or contractor in arrears – or indeed by results.
CAF Venturesome has been very successful in this area, making over 500 investments since 2002 worth a total of over £40 million – with a cumulative default rate over 14 years of 7.1%. The recycling rate that our fund experiences also suggests that taking on a loan in appropriate circumstances is not as high risk a proposition as some organisations may think.
Here at Venturesome we do not think that social investment is suitable for every organisation. We recommend that before you look at social investment you engage with your trustees or non-executive directors, funders and other organisations in your sector that have raised social investment. Given the uncertain period that we are currently seeing with the backdrop of government funding cuts it is important that charities and social enterprises focus on how they can become more financially resilient. Social investment could be a powerful tool for organisations in such a period. If you would like to find out more please get in touch to learn more about how we can help.
Want to know more about CAF Venturesome?
Talk to our team on 03000 123 300 or email us at venturesome@cafonline.org and we’ll be happy to help.