How can we increase supply of capital to the third sector?

How can we increase supply of capital to the third sector?
Third Sector, John Kingston

There are three types of capital that community groups, charities and social enterprises commonly need to meet three broad funding scenarios.

The first is capital to buy a building or another tangible asset. The second is working capital to assist cash flow, such as when a grant is paid in arrears and there is insufficient cash to cover wages before the grant is received. The third is risk capital, used when a charity has an ambitious growth plan that is likely to diversify and increase its income.

In the first situation, charities can usually get the money with a mortgage from a high-street bank. But in the second and third cases, charities are often unable to offer security, so are unlikely to receive finance from mainstream lenders; other sources need to be found.

Several organisations that have started to provide this sort of capital attended a round-table meeting held by Nick Hurd, the Minister for Civil Society, to talk about how this supply could be expanded.

One source of capital will be the Big Society Bank, intended as a wholesaler to front-line retail suppliers. The bank will be set up to build a long-term supply of capital for community groups, charities and social enterprises. It will do this by stimulating existing and new suppliers so that organisations’ capital needs can be met.

Where else might this long-term supply come from? Commercial capital is one potential source – banks and other investors are more likely to lend to charities than before. But this can be only part of the story, otherwise social investment will focus entirely on financial return at the expense of social impact.

Another, tougher source to access is philanthropic investment, which will focus on social impact first and financial return second. Efforts should be directed not at cannibalising existing donations to the sector, but at increasing the total available funds.

In this latter field, some pioneers are already doing encouraging work, such as the 9,000 investors in Shared Interest – an ethical investment fund for the fair trade movement – the Esmee Fairbairn Foundation’s Finance Fund and several community share issues, such as the successful project to build a wind turbine in Hockerton in Nottinghamshire.

The Office for Civil Society and the social investment movement must ramp up these varieties of capital supply over the next five years. But supply alone is not enough. To develop this new form of capital for the sector, we also need confident and informed demand from community groups, charities and social enterprises.

John Kingston is director of CAF Venturesome