Funding Enterprise Culture – Where social benefit meets business
Third Sector magazine
Organisations need different kinds of funding models as they set up more projects with social goals, as Patrick McCurry discovers.
There aren’t that many voluntary sector events that can attract speakers with the influence of Labour General Election supremo Alan Milburn and former Downing Street head of policy Geoff Mulgan.
Their appearance at the Social Enterprise Coalition’s national conference in Manchester next week illustrates the importance that government puts on this emerging sector – not least when it comes to the delivery of public services and regenerating deprived areas.
But what is social enterprise, and how does it fit in with traditional charity approaches?
In one of the most common definitions, the Department for Trade and Industry says that a social enterprise is ‘a business with primarily social objectives whose surpluses are principally reinvested for that purpose’. It adds that these enterprises ‘bring together the expertise and dedication of the voluntary sector with the flair and flexibility of the commercial world’.
In reality, the world of social enterprises is a highly diverse one, in which there is a broad range of models and approaches. Many social enterprises are rooted in the voluntary, public and private sectors and range from shoestring community enterprises to huge companies like the John Lewis Partnership. The result is a spectrum of emerging approaches to generating public good, which vary from pure charity at one end to purely commercial at the other. In between there are co-operatives, charities engaged in commercial activities, private companies involved in social good, and so on.
‘These different entities and approaches overlap, so that you get an organisation like Traidcraft, which is a company limited by shares, but is also engaged in public good,’ says John Kingston, a former venture capitalist now working with CAF.
At the same time as this new breed of enterprises has developed, many charities have decided, or come under pressure, to become more entrepreneurial.
Increased competition for grants and fundraising have meant that many organisations are looking to other forms of income generation. A small but growing number are considering radically different forms of finance, such as loans, to jumpstart entrepreneurial plans.
For example, Glasgow’s GEM Workspaces, a community-owned business with charitable status, acquires and refurbishes workspace accommodation to attract small businesses and economic regeneration to the city’s deprived Easterhouse district.
Traditionally, GEM has been able to find funding for its projects from grants, but today that’s no longer possible, so the organisation recently negotiated a £1.95m loan from Unity Trust Bank as part of a major new scheme involving the European Regional Development Fund.
‘Organisations like ours are no longer able to fully fund projects from grants, which is why we’re borrowing,’ says general manager John Russell. ‘There was initial reluctance from the trustees, who were not used to dealing with commercial finance, but they came round when they realised it was the only way and that it could help us become financially sustainable.’
The loan from Unity Trust will be paid back with income from the workspace scheme and, eventually, GEM will own all of the property, giving it an asset that will help ensure its financial security.
Financial institutions such as Unity Trust, Charity Bank and Triodos are helping drive changes in the traditional funding mix of charities.
So are the emerging ‘venture philanthropy’ funds, such as the Charities Aid Foundation’s Venturesome scheme, the Impetus Trust and the Government’s Futurebuilders programme.
Jonathan Bland, chief executive of the Social Enterprise Coalition, the sector’s trade association, stresses that there will always be charities that choose to remain charities because a market solution is not appropriate to the area they work in.
But more charities are interested in social enterprise, he says. Addiction and social care charity Turning Point could be seen as a social enterprise, he points out, given that most of its income is derived from trading: ‘The National Trust, too, gets a large part of its income from enterprise.’
As the social enterprise sector continues to grow, so does the Government’s attention to it. The DTI has shown keen interest in the concept and developed its own social enterprise strategy, and Alan Milburn is believed to be interested in the potential role of social enterprises in the delivery of public services.
But a report last year from CAF flagged up some key challenges facing those enterprises that started out as voluntary and community organisations.
One of the big problems is the potential clash between social and commercial goals, says CAF, although the sector is not always willing to admit it.
‘To suggest that there are tensions between the social and economic is to go against the grain of much social enterprise literature, in which social return and economic return are often portrayed as a ‘peaches and cream’ combination,’ the report says.
CAF is not necessarily talking about traditional charity trading, such as selling Christmas cards, which clearly separates trading from the charity’s mission. It is, rather, referring to examples where a charity or other organisation is seeking social gains through its main, commercial activity.
As one of CAF’s interviewees says, talking about an income-earning project employing marginalised people in the developing world: ‘That project probably caters for people who are among the poorest in the world. How are they going to make that a self-sufficient scheme?’
Mix of finances
Kingston says that one of the lessons that have been revealed in recent years is that social enterprises, especially those emerging from the voluntary sector, cannot quickly become self-sufficient.
‘You need a strong foundation and that probably means that a mix of financing, including grants, will be needed for quite a while,’ says Kingston, who now runs CAF’s Venturesome fund, which aims to provide innovative financing to help charities strengthen their capacity by seeking to fill the gap between grants and bank loans.
Malcolm Hayday, chief executive of Charity Bank, which makes loans to charities and to social enterprises with charitable objectives, says the vast majority of charities, especially smaller ones, still rely on grants and donations.
‘But increasingly, charities are looking for other income, such as contracting with the statutory sector,’ he says. ‘We’ve recently been in contact with a charity that is having a difficult time financially and having to consider charging for services for the first time, which is a hard decision.’
Despite the efforts of organisations like Charity Bank, some in the social enterprise sector argue that the case for loan finance has been over-emphasised.
Jim Brown of Bristol-based social enterprise consultants Baker Brown Associates says many enterprises would have been better off seeking equity investments rather than taking out loans.
He points to social enterprises like Cafedirect, which have raised capital from share issues. But one of the problems for organisations with charitable status is that they do not often have saleable equity.
Sarah McGeehan, a spokeswoman at trade association the Community Development Finance Association, agrees that there is a gap in the range of financial products.
Even though it is impossible for charities to raise funds by selling shares, McGeehan argues that a similar result can be achieved through certain quasi-equity investments. These include long-term subordinated debt, which means a loan that behaves in a similar way to equity. Such loans are similar to share income because they are long term and are repaid more slowly than traditional loans.
She adds that some of the new specialist funds along with the Futurebuilders fund are developing a wider range of products.
‘There needs to be more ‘patient’ capital because debt and equity play different roles in organisations,’ she says. ‘When an income stream hasn’t yet materialised or you want to take an organisation to the next step, it is good to have more equity.’
New legal structure
As well as new financing, there are proposals for a new legal structure – the community interest company (CIC). This is due to come into being next July as the first legal structure specifically designed for social enterprises. There will be some equity investment allowed, but within restrictions. However, it does not appear that organisations will be allowed to be both CICs and charities.
Jim Brown argues that charitable structures are not necessarily appropriate for social enterprises. ‘There are advantages, such as tax breaks, but a downside too. For example, it’s hard to make equity investment in charities.’
Another disadvantage is that charity trustees are volunteers, so they don’t get together that often and therefore charities can be beaten to fresh opportunities by commercial rivals.
‘It was this slowness that led many housing associations to lose out to private companies when it came to land deals,’ says Brown.
Whatever use is made of new legal structures or funding mechanisms, for many charities a growing focus on entrepreneurial activity seems inevitable.
Some welcome this trend, while others worry that traditional activity could be undermined. But the changes seem here to stay, and the coming years will show to what extent the voluntary sector is able to incorporate an enterprise culture.
– For information on the Social Enterprise Coalition’s conference, visit www.socialenterprise.org.uk
ALTERNATIVE FUNDING OPTIONS
Futurebuilders Government-funded programme to build the voluntary and community sector’s capacity to deliver services. It includes loans in its funding mix and aims to encourage organisations to move away from grant dependency. www.futurebuilders-england.org.uk/index.asp
Charity Bank Lends to charities and community groups. www.charitybank.org
Unity Trust Bank Provides banking and loan services to charity and not-for-profits. www.unity.uk.com
Triodos Bank Provides banking and loan services to charities and not-for-profits. www.triodos.co.uk
Venturesome Provides ‘custom-built financing’ that fills the gap between grants and loans. www.cafonline.org/venturesome
Impetus Trust Provides long-term investment funding and hands-on support to charities. www.impetus.org.uk
CDFA has details on community development finance institutions (CDFIs), some of which lend to or invest in charities. www.cdfa.org.uk
CASE STUDY – HILL HOLT WOOD
Hill Holt Wood is a woodland area in Lincolnshire that was bought by Nigel and Karen Lowthrop in 1994 and turned into a community-controlled not-for-profit business. This means that the company’s members, who include local people, staff and funders, elect a board.
The company’s main income comes from contracts with the county council to educate and train excluded teenagers, and with the Learning and Skills Council to provide skills training to young unemployed people.
Nigel Lowthrop says: ‘When we set up the organisation we looked at what legal structure to use. We thought about seeking charitable status but decided it wasn’t appropriate because our main activity is trading.’
But he says the organisation is considering setting up a charitable trust to own the land, because this would give extra protection. ‘The social enterprise would then pay a rent to the charity for using the land,’ says Lowthrop.
The enterprise is carrying out research with think-tank the New Economics Foundation and Social Enterprise East Midlands into social and environmental auditing.
‘If the sector can quantify the social return on investment, that will be an important step forward,’ says Lowthrop. He believes that social auditing could be used to persuade the statutory sector to use more social enterprises to deliver services.
‘If a public sector organisation realises the social benefit, as well as the commercial benefit, of contracting with organisations like us, they will be more likely to do so.’
Source: Third Sector