With grant finance becoming less and less certain, social purpose organisations are having to consider new ways of ensuring they can continue to provide essential support to the most vulnerable members of our community. Although a loan cannot be considered a replacement for grant funding, as it will eventually have to be repaid, it can be part of an organisation’s total funding package, and be used as a tool to unlock other funding, to transform or introduce new ways of working.
Many small to medium-sized charities do not consider repayable finance, i.e. loans, because they do not have any assets they can offer as security. While it is true that many traditional lenders ask for security in the form of an asset or trustee’s/director’s guarantee, this is not the case with specialist social investors. Social investors, unlike banks, are willing to support what may be perceived as higher risk loans, in order generate positive social impact.
Charity trustees and senior management are becoming more entrepreneurial in their outlook, as they explore ways to diversify income streams so as not to be reliant on a single source of revenue. A small-unsecured loan could be used to expand or launch a new project without having to deplete a charity’s reserves. That said, the social investment will only be forthcoming if the investor is convinced that the organisation’s plans and financial forecasts show that the new project will generate sufficient income to repay the loan and add to the long-term stability of the borrower, as well as lead to positive social impact. An added benefit of the process of applying for social investment is that it can lead to improvement in governance, internal management and financial discipline.
A small-unsecured loan can be a more straightforward, flexible form of finance when compared to a grant with strict conditions and onerous reporting requirements. Such loans can be used to strengthen internal infrastructure e.g. financial/I.T. systems or implement more robust social impact reporting procedures, which will place an organisation in a better position to apply for other sources of grant or contract income. Contracts tend to be paid in arrears and the loan could be used to provide the necessary working capital needed to cover operational costs before payment is received.
We discussed social investment with our members over the last two years, before deciding that the best way to support the sector further is through our own social investment fund. We want to work with you to explore ways in which social investment can be used to create lasting change by strengthening the sector and unlocking potential.