By Ben Rick, Managing Director, Social and Sustainable Capital (SASC)
It’s Small Charity Week from the 18th to 23rd June 2018. This is an ideal time to look at how small charities can benefit from social investment, something they may not have yet considered.
At a time when the sector is dealing with financial challenges, including the decline in the availability of local authority funding and increased pressures on household disposable incomes, small charities are often the hardest hit.
Social investment can be a way for charities to become less reliant on grants and donations. It can help to foster a more stable and sustainable funding model at a time when grants and donations are harder to predict.
It’s a growing market. Big Society Capital (BSC)[i] estimates that around 3,500 charities and social enterprises in the UK have now benefitted from social investment. The market is growing by around 30 per cent a year and the capital applied in social investments has grown to £1.5bn[ii].
However, taking on social investment isn’t right for every charity or social enterprise. Smaller charities especially may have concerns or feel like they lack knowledge of this growing area.
Taking on social investment can feel, or can be risky. Organisations may worry about the pitfalls of taking on repayable finance, as well as the pressures of being highly accountable to an external stakeholder or investor.
It’s important therefore for those considering social investment to understand the risks and the benefits clearly before taking the plunge. Here are our recommendations for small charities considering their first steps into this world.
It’s all about the people
We have learned that whatever the numbers say, people are key to the success of an investment. That’s why we have backed near start-ups and organisations doing interesting things or entering new geographies for the first time. The ability of the team to demonstrate their skills and successes is as important as a good corporate track record.
And it’s not just the management team – quality governance is a key consideration in our investment decisions. We can take more risk if there is a motivated group of experienced people surrounding the management team.
The importance of income generation
Our investment is often used to unlock new revenue streams. An organisation requiring capital to develop a new service that once established will unlock access to a contract is appealing. This is often the case when organisations are considering their ability to deliver a service to a local authority or another type of commissioner.
Investees need to be able to demonstrate they can pay back finance, but social investors work in the real world of government cuts and understand the pressure of shrinking expenditure on vital services. We are increasingly finding ways to work with investees to share risk as a way of unlocking opportunities for them. One example is our new housing structure which allows organisations to benefit from owning residential property for use by their beneficiaries without taking the associated risk. Another approach we have taken is providing the working capital for organisations taking on payment by results contracts where SASC shares the risk of contract delivery.
Preparing the business case
Where available we recommend that investees submit 3-5 years’ worth of historic financial information and a well thought through business plan and projections – substance over style for the business plan. And investees shouldn’t worry if past performance has been mixed, we know this is only part of the story – we’ll need an explanation, but we’re really looking to understand how the situation will change in the future. Having a good narrative is vital for potential investees. A clear link between how the investment will be used and how it will be repaid is also key.
Projecting the costs
We recommend that investees are careful when projecting costs. Being overly conservative can undermine interest in the project – but it is also important for them to remember they will need to justify and explain the numbers. Comparing their projections against other organisations doing something similar is a good way to make sure they are striking the right balance.
Social investment is an option for both large and small charities and we want to help more organisations access this type of funding in the future.
Read about how we’ve helped several smaller organisations access and benefit from social investment, and the impact this is having on their beneficiaries in our latest Impact Report 2018.
About Social and Sustainable Capital
SASC provides simple finance for extraordinary charities and social enterprises. We believe greater access to the right kind of investment makes charities and social enterprises better able to tackle society’s most pressing challenges. Our funds provide flexible capital to enable social sector organisations to grow their social impact, improving the lives of disadvantaged people across the UK. SASC is a social enterprise.
Ben Rick, Managing Director, Social and Sustainable Capital (SASC)