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Not all news is bad news

16th January 2012 in Business loans, Current Affairs

Catherine Wheatley from The Sunday Times discusses the importance of Community Development Finance Institutes in the local and national economy in her article that was released on the 15/01/2012.

David and Penny Beech despaired when their bank refused to lend their mast-making business, Sailspar, the money for materials to fulfil a big order.

The £170,000 contract from a large dinghy and catamaran supplier represented almost half of the family-owned firms' tunrover. The Job would guarentee the business, and its nine staff in Great Bromley, Essex, a safe passage through turbulent times in the marine industry

"We were up to our credit limit and we already had a loan from the Enterprise Finance Guarantee Scheme so the bank would not help us. It was a very frustrating," said office manager Penny, 54, whose husband David, 57, is Sailspar's managing director.

But help arrived when the Federation of Small Businesses directed them to Foundation East, a community finance organisation that provides small loans to small companies in East Anglia, Hertfordshrie, Bedfordshire and Essex that have a viable business plan but cannot obtain bank loans.

It lent Sailspar £30,000 over three years to pay of the company's credit cards and buy raw materials. "It was a huge relief. It's not a big sum but without it we would have laid off staff or even gone out of business," said Beech.

As a condition of the 2009 loan, it also sent a mentor to advise on cashflow management and strategy. Since then, the company has diversified into frabrication handrails and other aluminium fittings for vessels that supply wind farms and has pushed up turnover by 20% to £480,000. "For us the loan was a turning point," Beech said.

Foundation East is one of 38 non-profit community development finance institutions (CDFIs) in Britain supporting small firms. Several more make loans to home-owners and social enterprises.

Unlike so-called crowd-sourced funding websites, CDFIs are run by and for the community, said Katy Ford, Foundation East's chief executive. "We are an old fashioned mutual society that does what bank managers used to do, which is talk to people, assess their drive and passion instead of their credit score, and put money into the local community."

CDFIs were launched in 2001 with backing from the now defunct Phoenix Development Find, which supported enterprise in deprived areas. Since then they have won finances from various government agencies, banks and charitable trusts. Some are regulated by the Financial Services Authority and all abide by the Community Development Finance Asspciation's code of practice.

Last year CDFIs made about 1,500 loans worth £24m to start-ups and established firms turned away by their banks, according to the association. The funding helped create 720 businesses and safeguard a further 600 firms and 3,400 jobs.

For small companies such as Sailspar, these unsecured loans can be a lifeline, even though they typically carry an interest rate of 19% to reflect their risky nature. The rate is higer than some bank interest rates, but lower than charges on credit cards or payday-type loans. Ford thinks the figure is reasonable. "It's what we need to charge to cover our costs," she said.

However, after more than a decade, CDFIs are still fairly unknown in Britain, where they account for less than 1% of the financial services sector. "Perhaps because they are stuck halfway between lending and community development", said Tony Greenham of the New Economics Foundation, a think tank.

Bycontrast, CDFIs are an important part of American enterprise funding. In 2008, the most recent year for which figures are available, they provided more than $5.5 billion for community development activities and created or safeguarded more than 35,500 jobs, according to the Opportunity Finance Network, the sector's trade body in America.

Part of their influence derives from the Community Reinvestment Act, which obliges American banks to publish a geographical breakdown of loans and deposits. "Essentially, if banks take deposits from an area, they have to be seen to lend there too," said Greenham.

In Britain, one of the final recommendations of Sir Ronald Cohen's Social Investment Task Forces when it was wound up in 2012 was a similar act to encourage banks to identify and invest in disadvntaged communities.

Meanwhile, the Community Development Finance Association is working with the Treasury, the British Bankers' Association and Britian's four biggest banks on a system that would automatically refer companies to their local community finance organisation when they have been declined a loan on the hig street.

"We are starting to see a real groundswell of interest among the public and politicians in next-generation finance that goes beyond the traditional banking services," said the association's chief executive, Ben Huges.

Nicki Hayes, a public relations and business consultant, has been supporting firms in her home town of Bury St Edmunds, Suffolk with a £100 loan to Foundation East. As an individual backer, she benefits from community investment tax relief of 5% a year on sums invested over five years.

"Everyone talks about 'keeping it local' and 'small is beautiful' and when I moved back to area after living in Dublin I started looking for a way to live those values," she said.

"These institutions go back to the ideas of mutual organisations with great governance and local knowledge helping their community. I think it's the way forward."

Greater influence for the CDFI network would also be welcomed by local enterprise, according to Phil McCabe of the Forum of Private Business.

"Small firms need a range of funding sources and our members are concerned about the erosion of local services." he said. "Higher profile CDFIs would be timely addition to the mix."

For firms such as Sailspar, their presence is not just welcome, but essential.