Loans Finance the Future

Loans Finance the Future

Third Force News

Not-for-profit organisations are entering a new area of income development through self financing. Some Scottish groups are supplementing grants with private loans.

AGAINST the background of a decrease in traditional grant funding for projects, the pace of change is gaining momentum for social enterprises and charities in Scotland. A growing number of organisations are now looking to develop their own income generation to become more financially stable in the long-term.

The drive for greater sustainability; has considerable political support. t The European Union offers access to structural funds worth up to 50 per cent of funding for a project, but the applicant still has to find ‘matched funding’ for the rest of the project. The EU identifies local authorities, local enterprise companies, further and higher education institutions, environmental agencies, the voluntary sector as well as the private sector as partners in the decision making and delivery of funds.

Organisations engaged in social economy activity include social firms, community enterprises and other community-based organisations, self-help groups and other mutuals that satisfy the public-benefit principle, housing associations and campaigning groups.

Investment in the social economy sector by the Scottish Executive has seen a steady increase over the last five years. The executive is now seeking to benefit from improvements in the sector. Funding to the sector from all Executive sources totalled £3(:1) million in 2002/03 -an increase of £17 million over the previous year. Taken together, Scottish Office and Executive policies over the last five years represent a major investment in the capacity of Scotland’s social economy, with expenditure on the sector’s infrastructure in the current year rising to about £10 million. The challenge for the Executive is to ensure that it obtains the best possible return on its investment by ensuring that the actions the sector takes allows it to contribute its full potential to deliver against Executive priorities.

The Review of the Scottish Executive’s Policies to Promote Social Economy’ states that one of the obstacles perceived to stand in the way of the sector fulfilling its potential is the ‘funding arrangements for social economy organisations, and linked to that a lack of assets.’ It states that ‘While charitable fundraising direct from the public or from grant-giving trusts remains an important source of income at around 25 per cent of the total, the social economy sector has been steadily developing its capacity to earn income. Trading, rents and investments now provide 32 per cent of income while another 11 per cent (£200 million) comes from mainstream public service markets through contracts or service agreements.’ The Executive is concerned that there are four main weaknesses in the current structure of finances supporting social enterprises.

• Finance options lack diversity.
Income is restricted in many cases to grants and charitable giving. Where organisations seek to access commercial financial products, they often find that those products do not fit their particular financial needs. Organisations also need to consider how better use of a range of financial products could help them to be more effective.
• An inherent lack of stability in the income streams of many social economy organisations.
This is especially where income is dependent on grants or renewable three-year service agreement.
• The lack of an adequate asset base that can open up access to financial products. Although many organisations have assets, they have too few to be considered for financing options, especially where there is no property with- in the portfolio.
• A current inability to build up reserves.
It is impossible to build up significant levels of savings from purely grant- based funding. This, in turn affects the ability to develop long term strategic planning.

Futurebuilders Scotland is an £18 million investment in the social economy to run over the financial years 2004/05 and 2005/06. Its purpose is to extend and strengthen the role of the social economy sector in delivering better public services. It consists of a £16 million Direct Investment Fund, which is underpinned by £1 million training fund and a £1 million support programme. In the two year period of the initiative, Futurebuilders Scotland’s key objective is that over the period of implementation, 500 social economy organisations develop their service delivery activities in areas directly relevant to the delivery of Executive priorities. In addition, it will track:
• increases in number of tenders for public service delivery;
• increases in number of organisations taking on specific public service delivery contracts for the first time;
• the creation of new employment or development opportunities (particularly for young people and individuals furthest from employment within the sector);
• the uptake of training opportunities;
• increases in accredited qualifications; .the number and value of community assets.

South of the border too, Futurebuilders aims to reduce the grant dependency of the voluntary and community sector by offering an investment menu where loan funding is a substantial part of every full investment made. Futurebuilders England only invest in voluntary and community organisations involved or planning to become involved in public service delivery (where more than 50 per cent of the required income flowing from the proposal once up and running will come, directly or indirectly, from the public purse).

‘Many voluntary and community organisations already deliver excel- lent public services but are funded in ways that undermine the long term quality and sustainability of those ser- vices,’ says Jeremy Wagg, Executive Director of Unity Trust Bank, who also sits on the board of Future- builders England. ‘We want to sup- port organisations to develop their public service delivery in a way that encourages full cost recovery and sustainability. We believe that loan finance can achieve both those goals.’

Following its experience with Futurebuilders England, where loans to enable voluntary organisations to create assets are more commonplace, Unity Trust Bank has developed a similar provision in Scotland. Falkirk Counselling and Support Service for Alcohol and Drugs is one charity looking to reduce its dependency on grants by developing an asset in property.

With 30 years of expertise in helping people to break free from drug and alcohol dependency Falkirk Counselling offers services via GP surgeries throughout the Forth Valley. Working across three local authority areas it has a number of projects based in Clackmannanshire, Falkirk, and Stirling that provide counselling for people worried about their drinking or drug use, or their families.

Forth Dimension is the Falkirk Counselling rehabilitation project, where up to 75 clients spend up to seven months learning how to help themselves integrate into the community again. Clients learn how to build a computer and develop other computer skills; participate in group sessions on relapse prevention, anger management etc; develop skills in gardening or woodwork. They keep fit though use of gym to do weights, play badminton or football and are given opportunity to practice a range of other hobbies. Clients also have regular access to a key worker throughout their time at the Alloa centre. The project has successfully helped clients to build enough confidence to enter full-time work or education.

The scheme has been using buildings that are not particularly suitable. Chief Executive, Janine Rennie says: ‘It would be great to have larger premises and acquire property that will become an asset instead of throwing money away on rent’.

It is looking for a property where it can combine offices with workshop facilities for training clients in the gar- den furniture business. In addition the charity is looking to have sufficient space for conference facilities which can be let out to generate another income stream. Falkirk Counselling has agreed a loan with Unity Trust to help purchase and renovate the property and they are now actively seeking premises. Additional funds are due to come from three local authorities in the form of matched funding and also from the European Social Fund (ESF).

The final stage of the Forth Dimension project is to provide initial employment through a separate social enterprise business for clients who often face being stigmatised when trying to return to work. A combination of types of funding was needed to deliver such a range of aims within the projects run by Falkirk Counselling. Finance from the European Social Fund, for example, can only be used on the community rehabilitation project. Without those funds, and suitable premises, the project would not have been able to move forwards. ‘The enterprise will be run on grants in the initial stages, but over time, it will build up income from the sale of garden furniture and conference centre facilities,’ Janine adds.

Regenerating the Greater Easter house area of Glasgow is the mission for a group of local people who set up GEM Workspaces, who provide man- aged work spaces for small businesses. Facilities include free parking, 24 hour access, security systems, care- taker and secretarial services. It is the Centre’s aim to provide good quality, affordable business premises to new I start up businesses and to provide ‘ these companies with room to grow and expand without having the upheaval of moving to a new address. The business was set up in 1987 as a community-owned business with charitable status and currently operates two properties where 44 business tenants employ over 300 people. ‘We built up the business with the help of grants but times change,’ says General Manager John Russell: ‘It is no longer possible to fund new projects entirely through grants’
So, in order to meet ambitious plans for a 36,000 square foot business centre in Queenslie, GEM Workspaces has borrowed £1.96 million of the £4.7 million costs. A similar amount is coming from the European Regional Development Fund (ERDF). The balance will be provided by Glasgow City Council, Enterprise Glasgow, and from GEM Workspaces’ funds.

A changing funding environment can make things difficult for enter- prises like GEM workspaces, but it is also an opportunity. Russell says: ‘When an organisation takes out a loan, it is forced to think through its plans rigorously. Like commercial businesses, non-profits should also be able to grow.’

Unity Trust Bank is involved in a number of initiatives in Scotland including work with Credit Unions- an area increasingly supported by the Scottish Executive. Addressing more that 130 people from the financial services, legal, accountancy and charity sectors in Scotland, Helen Liddell, Secretary of State for Scotland, said: ‘The Government and the Scottish Executive have both supported credit unions, which help to provide c0- operative financial support to people in their local communities.’ She continued: ‘Credit unions are now regulated by the Financial Services Authority. This new regulatory regime increases the protection for members’ savings, so people can invest in credit unions with confidence. And the Scottish Executive has a £1.5 million action plan to provide support to credit unions and to enhance services across Scotland.’

So the environment for not-for- profit organisations is changing. There are fewer grants, and many grant-making bodies now insist that the organisation match any funding they may offer. As we have heard above, though, the change does not need to be a stressful one. It can be a great opportunity to examine the long-term strategy of the organisation and to put it onto a firmer footing for the future.

For more information on the Unity trust Bank’s services, visit