Invest socially and reduce your tax burden
The domino effect of raising community finance to support local business people
Earlier this month I used this blog to put out a call for investors. In it I made the bold claim that when you take into account the inputs, outcomes and impacts resulting from lending to and supporting financially excluded small businesses, Foundation East generates an average social and economic return (social capital) equivalent to £15.68 for every £1 spent providing these services. I also promised to share how.
Well, here’s the how!
How does Foundation East, a Responsible Finance provider, deliver a return of £15.68 for every £1 spent?
Foundation East offers business loans and support when the banks refuse credit. We are a Mutual Society that raises money from local people and businesses (through selling membership shares), by borrowing from social banks and through delivering government and private sector contracts.
During 2013 – 2014 we became involved with a working group of the Community Development Finance Association (CDFA, now known as Responsible Finance), of which we are a member, to develop a methodology for measuring the economic and social impact of members’ work.
Responsible Finance (then known as CDFA) commissioned Dr Nick Henry from Coventry University to undertake research and develop such a methodology, or tool. Using HM Treasury’s Green Book (1) of official statistics as the basis for the proxies used (for example the cost of paying unemployment benefit to someone for a year), the tool, once created, was shared with Government departments including HM Treasury, BIS and the Cabinet Office. It was acknowledged as a robust tool providing irrefutable evidence.
The tool measures metrics in terms of inputs, outcomes and impacts in order to arrive at a figure that indicates the total social and economic impact of each £1 spent by Responsible Finance Providers providing their services to their customers.
In order to fully explain this, it is necessary to understand the difference between the inputs, the outcomes and the impacts that result from lending to, and from supporting financially excluded small businesses.
Inputs are the costs that Responsible Finance companies (such as Foundation East) incur to provide their services. These costs include insurance, staff salaries, typical business overheads, travel expenses and an estimation of the losses we expect to incur on loans (2).
The recognised outcomes of the social inclusion facilitated by our loans are the creation of new businesses, the preservation of existing businesses, the creation and safeguarding of jobs and the upskilling of the workforce.
The impacts are what happen next. Impacts are both economic and social, as illustrated above. The people we provide loans to are often claiming welfare benefits, including job seekers allowance, working tax credit and housing benefit, at the point at which they apply to us for a loan. The economic benefits to the state from providing loans to enable these people to set up, or grow their business include increased corporation tax collection from profitable businesses, increased personal tax and decreased welfare payments. Research also shows that people who are in work are generally happier, have greater personal aspirations and are more in control of their lives.
To establish what the equivalent economic impact of Foundation East’s lending and support service to financially excluded businesses was in 2013/14, Responsible Finance multiplied the number of jobs created and saved, and number of businesses started and saved, by the proxies in the tool.
To arrive at our final figure, the value we deliver for every £1.00 spent, we divide the total value of our impacts by the total value of our inputs and arrive at the figure of £15.68.
So there you have it, how we turn every £1.00 spent into £15.68 value.
We are currently verifying 2014 – 2015 data and look forward to sharing how well we did. What I can share though, is that we fully expect this figure to have positively increased. Indeed, it is likely to increase year on year, so long as we lend more money to more businesses. Why? Because the value of our inputs will never increase disproportionately and, as long as we keep lending, the value of our impacts will always keep on increasing.
In order to lend to more businesses though, we need more capital. Since the beginning of 2016, 49 businesses have enquired about borrowing for an amount totalling £386,900 because they can’t get the funds they need from other sources including banks, peer to peer lenders and crowd funders. These are businesses such as Brightside Roofing Ltd and KC's Ices.
Can you help us to help these businesses?
As existing investors in Foundation East know, Foundation East offers an ethical investment opportunity on which you can claim 25% CITR (Community Interest Tax Relief) over five years. And, as I hope I have demonstrated above, by investing your money into Foundation East membership shares, of which 100% is lent to financially excluded businesses, Foundation East is delivering substantial social and economic benefit.
So, if you, like us, believe in creating opportunity for all please do become a member or get in touch with us today.
(1) The HM Treasury Green Book provides guidance for public sector bodies on how to appraise proposals before committing funds to a policy, programme or project.
(2) As a risk lender, we anticipate that some of the money we lend will not be repaid. It’s not all bad news though because, through being given the opportunity afforded by a loan, the local business owner has benefitted in other ways including improved learning, improved life skills, improved knowledge of how to run a business and how to apply for finance.