Crunch Time

Crunch Time
Rosie Nivenn , newstart

This time last year, anyone using the term credit crunch would have met with a blank look. But now we are all feeling the effects of the squeeze on credit, brought on by ill- advised lending in the US.

World financial markets have been in a tailspin since the summer of last year. UK consumers have been hit in the pocket as a result of the withdrawal of cheap loans and mortgages. Businesses are struggling to access the finance they need to grow or survive.

Research by social entrepreneur networking website, UnLtd World, reveals that nearly 40% of small businesses and social entrepreneurs have experienced cashflow problems in the past few months as a result of the worsening economic situation. The survey also found 68% of business owners who recently applied for a business loan or credit card had been turned down.

Banks are putting up their rates or tightening their lending criteria, making it more difficult for businesses to start up, expand and add to their asset base. Many are scaling back on their corporate social responsibility programmes, contributing less to trusts and foundations. Northern Rock’s troubles Iprompted its charitable foundation to cut the

Money and Jobs grant programme that had been a major provider of grants to development trusts in north-east England.

But social enterprises may be in a better position to ride out the negative impact of the credit crunch than other businesses. One factor that works in their favour is their eligibility for credit from community development finance institutions (CDFIs) such as Triodos, Unity Trust and Key Fund. These lenders often work exclusively with businesses with social and environmental goals, giving them access to sources of borrowing not available to mainstream businesses.

John Kelly, head of client investment at CCLA, a specialist investment management company working with the public sector and third sector, says only institutions that rely on raising cash through inter-bank lending are having to scale back their loans. ‘The good news for social enterprises is there are a whole range of providers who didn’t engage in these activities,’ he says. ‘They are awash with cash and haven’t been affected by the credit crunch. Many CDFIs have not been forced to put their loan rates up. They are also experiencing strong growth, with a £287m loan portfolio in 2007. But Mr Kelly predicts they won’t escape the credit crunch altogether. ‘The interesting thing is what happens next,’ he says. ‘So substantial has been the credit crunch, it will no doubt affect the wider economy.

At the moment the sector is well placed, because it has not been part of the excesses, but over time the credit crunch will feed through. It will hit everyone by late 2008/2009. This insulation from the difficulties being faced in the wider market may explain the steady heart rate of some social entrepreneurs, including financial specialist Daniel Brewer, who feels the effects of the credit crunch are being overstated. the moment it seems more of an excuse for things not happening,’ says Mr Brewer, director of financial specialist Resonance. ‘It seems like business as usual on the ground. There are some impacts we are starting to feel, but they are mostly to do with the perception of caution. But although the credit crunch is fuelling the economic slowdown, it isn’t the sole factor pushing the UK towards recession. Optimists believe recession is far away; others insist it is on our doorstep. If it does arrive, many observers agree that some social enterprises will be hit much harder than others.

John Kelly believes a recession is well on its way, and that this one will knock consumers for six, at a time when they are already battling high prices for food and fuel and rising mortgage costs. Social enterprises producing goods for consumers could be badly affected. Conversely, those delivering services on behalf of public sector bodies appear well placed to escape the worst of the downturn.

The message from the experts is that social enterprises must make sure their business plan is robust and that their products or services are needed. They are also being advised to make sure they have a goodxelationship with their lenders.

Nick Temple, network director at the School for Social Entrepreneurs, says social enterprises must be able to talk to their lenders when they start having problems. ‘They wouldn’t be able to throw good money after bad, but they would not want to see their investment wither on the vine,’ he says.

Hugh Rolo, chair of Key Fund and the Development Trusts Association’s investment manager, predicts businesses in the sector could start looking at more imaginative ways of raising money, including community share issues, something CDFIs are beginning to support. ‘The semi withdrawal of the commercial market from property based lending to social enterprise will reduce the overall availability of debt to the sector and, as with the private sector, I expect we may see more equity as an alternative to debt,’ he says.

While there is optimism that social enterprise will be better insulated from the credit crunch than other sectors, there is also concern for those the sector serves.  Hugh Rolo is angry about the way in which under-regulated activities in financial markets have brought real hardship to the most vulnerable people.
‘The CDFI movement in the USA, which is much larger, has been speaking out more vehemently, and has been tracking the consequences much more closely,’ he says. ‘The immediate consequences are negatively impacting the poor and black communities. I imagine at a gut level this feeling of anger must run through the social/community enterprise movement.