Finance & Procurement

Welcome to information about finance and procurement you can enter either the finance library or procurement library to search our resources.

Money...

When you're tackling finance it is important to think about the following:

Firstly, what is the money for? Is it to start a new enterprise; to expand an existing business or take on a new activity; or is it to meet costs, either regular or unexpected?

Secondly, think about the sources of money available to a social enterprise. These can be grouped as....

• Earned income
• Grants
• Loans
• Equity investment
  
  
  

So how do they differ?

Earned Income - is increasingly being regarded as the first choice to meet regular costs as well as potentially funding expansion. Earned income comes with no strings attached - it is money you can use to achieve your mission without interference from outside organisations. Many social enterprises use mission-related strategies to earn income. For instance employing individuals from the intended beneficiary group - this strategy kills two birds with one stone and also means the social enterpise's income generating activities are based in the field that the organisation already has expertise in.  Back to top

Grants – the great thing about grants is they don’t have to be repaid! But the process of applying for a grant can be time consuming and there is no guarantee of success. With ever-dwindling grant pots available even a previously supportive grant funder is not guaranteed to help in the future. Grant funders expect to see evidence that the money is being spent in accordance with their objectives, so there will be a requirement for monitoring and reporting, which can be extensive in some cases. Keeping the necessary records and compiling reports will take part of somebody’s time – so there is a cost associated with it. Back to top

Loans – you have to pay the money back, with interest. Interest and the period of the loan are commonly fixed from the outset, there may be arrangement fees to pay. There are several specialist lenders (who are social enterprises themselves) that understand the sector who will support you through the application process. These lenders will not require personal guarantees from your Board.

Lenders may require other security for instance a charge over an asset., however lack of security is not a barrier to lending in many cases. Much less reporting is required than with a grant, some lenders may make business advice available as part of the agreement. Registered Charities may take loans, provided their constitution gives the Trustees the power to do so. Social sector lenders will not lend unless they are convinced of your ability to repay, as social enterprises themselves they intend to support and strengthen the sector. Back to top

Equity Investment – sounds like we are getting technical, but the difference between equity investment and a loan is that an investor puts money into an enterprise in return for shares, usually without a fixed repayment date and without a fixed rate of interest. If shares (as is often the case in social enterprises) are not available quasi-equity or mezzanine finance may be used, the principle is that this is a long-term investment maybe because the an investor wishes to support the aims of an enterprise and is prepared to set aside some money to assist it. The investor is sharing some of the risk in an enterprise – there is a chance that they will receive no return on their money and if the enterprise fails, they will be a lower priority than loan providers for any repayment.

Identifying the commercial opportunities in an enterprise and building up income can often benefit from an independent, informed view – to pursue this, consult one of the social enterprise business advisors for a discussion. Back to top

Which to choose

Choosing the right source of finance depends on the risk involved. Trustees and Directors often view risk with horror, but it is inescapable in everything we do. The only option is to manage it. There is a wealth of information and advice on managing risk, but it really falls outside these pages.

In a simple summary, if a proposal has a very good chance of being successful, then loan finance should be considered. If it is less certain, look to investment. If generating income is really not an option, then seek grant funding. If income or retained income is available, it is a decision for the Trustees or Board – the money belongs to the enterprise and they can decide how it should best be used. Back to top

Who to speak to

Grants have, for a long time, been the mainstay of the voluntary and community sector. They are undoubtedly becoming more difficult to obtain and have a cost in the monitoring and reporting that will be required. However, at start-up or expansion, a grant may be worth considering. Finding a suitable grant provider can be time consuming. There are search facilities available on some web sites and some proprietary databases. Advice and support organisations may well have access to these – speak to your local Business Link or VCS. In choosing which provider to apply to, ensure that you can meet the criteria they publish – objectives vary from fund to fund and it is important to select one whose criteria match what you are proposing.

Loans are increasingly being taken up by the voluntary and community sector. Bank loans or overdrafts may be available from high street banks, but many will look for personal security. There are a number of social sector lenders, who will not ask for personal guarantees or security.

Community Development Finance Institutions, CDFIs, are one example (in the region, Suffolk Regeneration Trust (SRT), Cambridge Housing Society’s New Horizons scheme and a fund operated by Norfolk and Waveney Enterprise Agency). CDFIs will typically lend to social enterprises, but also to small commercial enterprises. Loans may begin from as little as £1000. Some will offer support in building up the necessary plans prior to an application for funding

Some lenders make loans available to participants on their training courses or business development schemes. Examples in the Eastern Region include In Credit and WEETU.

All lenders will expect to see a business plan that shows how the proposal will work and how sufficient income will be generated to meet costs and repay the loan and interest. In some instances it may be possible to negotiate a delay before payments begin (repayment or capital holidays). Back to top

For a list of lenders please see Finance Links

Venture Funding, Venture Philanthropy

Comparatively new to the social sector, venture capital has been established in commercial practice for sometime. An investor puts money into an enterprise without a fixed period or interest, in exchange for, say, a percentage of the increase in income. The investor will expect to take some part in the management of the enterprise.

This form of financing is attractive if there is an element of risk to the proposal, but the investor will be looking closely at just how great is that risk. Sums involved are generally greater than those available from loans

For more detail, see In Touch Issue 8, which carries two articles about venture philanthropy. Back to top

Not neglecting....

Funding out of income has many attractions, you don’t have to repay anyone and the reporting required is limited to your Board and members. It can take some time to build up sufficient funds for a major new project and this will always demand careful business planning.

None of these sources of finance need to be treated in isolation. It is not uncommon to use different sources of funds for different aspects of a project. There is a commercial principle of matching long term funds to long term investments e.g. using a grant for a major capital purchase; a loan to upgrade machinery or re-equip premises; and use income for those unexpected costs that always arise.

For further help and guidance on the whole process of business planning, see Step by Step from In Credit www.incredit.org.uk or Suffolk Community Enterprise’s Business Workbook. http://www.suffolkacre.org.uk/ Back to top

And finally …

All information is supplied in good faith, and we have done our best to ensure that it is accurate. However, errors can be made, so prospective borrowers are advised to check the facts before committing to any course of action. If any lender sees an error, please let us know and we will correct it. Back to top

You can search our library for sources of funding.