Masterclass on Social Investment for Consortia

 

The issue of access to investment finance by consortia, is an increasingly hot topic, as it is for voluntary organisations generally. This isn’t simply a matter of investment funding replacing grant funding, as is sometimes portrayed. Investment funding (by its nature) needs to be paid back, so it can’t by itself constitute a sustainable income strategy. However in combination with revenue sources, such as from social enterprise business models or from contract income, investment finance does have a valuable role to play.

Lack of access to finance is a particular issue for organisations operating in the social sector. Compared to private sector business models, the risks attached to those in the VCS where a social return is targeted instead or as well as a private return are not well known. Though private lending too has been hit by the banking crisis, banks do still lend to the private sector. Of course they lend to charities too, but there is far less precedent for funding initiatives that target a ‘twin bottom line’. Charities typically have the odds stacked up against them when it comes to accessing finance.

Of course the still relatively limited use of investment by the charitable sector isn’t just down to barriers on the supply side. Charities – particularly charity boards – can be notoriously risk averse when it comes to contemplating borrowing. Charities prefer to rely on reserves and even at the best of times can be notoriously reluctant to commit their resources.

As a result, when it comes to growing and developing their businesses in order to have the capacity to deliver a service, lack of comparable access to finance leaves charities at a disadvantage relative to their private counterparts. The private sector has an in-built advantage over the VCS and this is perhaps part of the explanation for their success at winning contracts.

The need to access finance is particularly acute for consortia, and this can be felt in a number of areas.

Like any start-up, new consortia need an amount of development capital to get them to the stage where they are up and running – delivering contracts and generating a revenue. Consortia can face the extra teething difficulties relative to a typical charity because they have to overcome barriers to collaboration and that means smoothing any conflicts that can erupt from their membership during and post development. Several consortia have failed at the post development stage prior to them having won their first contract. Most notably in recent weeks the Bedford based consortia – Consortico defaulted on a Social Investment Business loan. This example illustrates that access to finance by itself is not enough, but without some form of development finance or the luck in winning a first contract very quickly most consortia struggle to get through the 12-18 months that it typically takes to get them from start-up to contract delivery phase.

The second main area in which the need for finance arises is in relation to working capital, a need that is made acute now by the growing prevalence of payment by results models of contract funding. Under these, the consortia (and the organisations delivering the services) only get paid once the results of its interventions can be seen. Consortia have to work at risk, and front-line organisations can only take on these types of contracts if they have sufficient resources to fund this from their own budgets. The problem is lack of working capital. A working capital loan provides a resource – a bit like an overdraft – that organisations can dip into on the expectation that their bank balance will eventually return to the black once payments have been made. Without this kind of facility many organisations (and this goes for consortia too) simply can’t compete for this type of contract.

Thankfully there is more recognition now than ever before that consortia have these capitalization needs. Last month’s launch of the Investment and Contract Readiness Fund (ICRF) run by the Social Investment Business, makes now a particularly auspicious time for consortia. The ICRF gives social ventures the potential to bid for between £50k and £150k in funding. Most of this will be in the form of a grant, and ventures must partner with approved support providers in order to bid. ACEVO is pleased to announce that last week we were listed as an approved provider. In addition to this, the recent launch of Big Society Capital should do much to pump prime the market for social investment and increase the amount of private capital flowing into the social sphere. Big Society Capital will not fund frontline organisations but will act as a funder of existing and new investment intermediaries.

With all these developments, now is an exciting time for the consortium sector. We hope that the existence of better investment options will remove a critical barrier to continued growth and development for the sector.

Click on the link for more information about the investment and contract readiness fund

www.thesocialinvestmentbusiness.org/our-funds/beinvestmentready/

 

Case Study; Wakefield District Wellbeing Consortium (WDWC)

 

In late 2010 the WDWC Directors secured a mix of grant (£64,198) and loan (£59,922) from the Social Enterprise Investment Fund (SEIF) to capitalise the growth and development of the consortium.

SEIF took a (calculated) risk in lending the money to WDWC as the loan is unsecured. There are no capital assets to sell and the consortium is a limited company, so Directors are not personally liable should the consortium model fail. The mix of funding only covered the first year’s expenditure of the consortium, so the challenge to generate enough income to sustain WDWC and pay back the loan was considerable. SEIF’s decision to provide the funding was made on the strength of a robust business plan that included informed predictions of the number of contracts the consortium might win within its first few years of trading.

The loan was made over 5 years at 6% per annum. This equates to a monthly repayment of £1,230 and means the consortium needs to generate a surplus in order to pay the loan off.

In practice, the grant and loan have not been separated out in terms of expenditure, and have mainly been used to pay for staff salaries, rent and office costs, marketing materials, events and training for members.

Quarterly management accounts are provided to the Social Investment Business (which manages the SEIF funding), along with a brief written description of what has been achieved. Any contracts over £50,000 that have been secured are highlighted, as SEIF is particularly interested in the consortium gaining sustainability through contract management fees.

The consortium secured funding and contracts worth over £1.3m in its first year of operation, and is now sustainable for the next two years.

 

Pros of the SEIF loan:

Provides flexible working capital

It is unsecured

SIB require light touch reports – they focus on what’s important

Cons of the SEIF loan:

Application process was long and the requested 3 years funding was reduced to 1 year

It’s more expensive than a grant

 
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