Community finance: who will be the biggest beneficiaries? | Blog | Foundation East

Community finance: who will be the biggest beneficiaries?

20th November 2012 in Business advice, Current Affairs

At a recent conference Vince Cable announced £60m in extra funding would be pumped into the economy via Community Development Finance Institutions (CDFIs), intended for small businesses and social enterprises.

It was hailed as a small victory for the community finance sector, and a textbook example of collaboration between government departments and community finance organisations.

And social enterprises are certainly expecting to benefit. Nick Temple from Social Enterprise UK said at the time: "It will strengthen our social economy and help civil society organisations and social enterprises access sustainable funding, which has proved difficult in these austere times."

But how much of the money will actually reach social enterprises, and how much will go to commercial businesses?

The funding is being distributed via the Community Development Finance Association, which represents community finance organisations lending across three categories – businesses, "civil societies" (ie social enterprises and charities) and individual households.

None of their customers are currently able to borrow from mainstream lenders (such as banks, typically due to poor credit history, little collateral, or non-conventional legal forms (eg non-profit organisations).

Importantly, these CDFIs also tend to operate in areas of the country which are economically deprived, finding it hard to generate new businesses and sustain jobs.

Now that Vince Cable has announced the new fund, the CDFA is tasked with deciding where the money goes, and which CDFIs within its membership it will back.

Ben Hughes,CDFA chief, said: The CDFA has decided to focus on the micro and SME lending market. But we would count businesses they lend to as being within 'the social economy,' as they tend to create jobs in deprived areas."

This suggests that providers of loans servicing commercial businesses will stand to receive the majority of the funding.

But will any of this increased funding in deprived areas naturally seep into social enterprises? Well, encouragingly, social enterprises are highly likely to be already operating in these regions. Last year a study from Social Enterprise UK showed that 39% of social enterprises based themselves in the top 20% of deprived rural or urban areas nationally.

But just because the funding arrives in an area, it doesn't mean that social enterprises will automatically benefit. First, they have to be judged "investment-ready," and the picture, according to the head of policy at Social Enterprise UK, Kerry Jones, is varied.

"It's a very diverse sector, I do a lot of work with bigger social enterprises who are very much investment-ready, and then there are smaller ones who need a bit more work, and closer support. It is a mixed picture out there. There's a general consensus that more investment needs to be put into making social enterprises investment-ready."

Second, CDFIs need to be prepared to work with social enterprises. But community finance organisations tend to specialise in just one area, either businesses or social enterprises/charities or households, and last year 61% of CDFIs did not serve social enterprises at all.

Sarah Osborn, fund manager with Bristol Enterprise Development Fund, says for some social enterprises it's harder to borrow. "They can't offer the same level of financial stability. And for-profit companies will always make a more viable business case."

This is particularly important for CDFIs, as while they receive funding from various government organisations, if loans default it rests on the CDFI themselves to pick up the pieces.

There is of course the question of defining what a social enterprise is, as you could argue that much of the activity undertaken by entrepreneurs in deprived areas of the UK is creating "social good" simply through job creation.

Social Enterprise UK states on their website that a social enterprise must have a "clear social and/or environmental mission set out in their governing documents." It must also reinvest all its profits into the business, as well as trading as a means to financial security rather than grants or donations.

For some it's possible to cast the net much wider. Sarah Obsorn invests nearly all of her development fund into businesses rather than pure social enterprises. She believes "job creation in itself is good. It's very hard to measure but it seems that creation of businesses and jobs is creating opportunities for people, which is a good thing."

And with most CDFIs being in themselves social enterprises, with a clear purpose for either servicing undernourished local economies, working with charities or helping households escape from loan sharks, in that sense all the money will reach a social enterprise, even if it is just an intermediary.

What remains true is that competition for CDFI funding is fierce. While CDFIs lent a healthy £118m to social enterprises last year, applications from SMEs saw a 150% increase.

And for Richard Glinn, marketing and membership manager at Foundation East, a community finance organisation which services east England, he thinks even more social enterprises will now be attracted after Cable's announcement.

"The money is fantastic, it will be a marvellous help. But we're expecting more applications to be coming through from social enterprises and the trend looks to be increasing. And we have a strong history of supporting socially-minded businesses. So these are going to be considered on an application-by-application basis right alongside social enterprises."

What attracted the Regional Growth Fund to route funding through CDFIs is clear, these organisations have a social conscience and proven track record of dealing with tricky sectors which the mainstream banks won't touch. In addition they represent value for money, with jobs created by CDFIs costing roughly £5000 each, which represents value for money when compared to other economic sectors.

It now rests on the community finance organisations to provide the right backing, in the right places, and also for social enterprises to make their applications for funding shine despite the increasing competition.

Alastair Sloan is a freelance journalist and social entrepreneur. Article Published on the 7th November 2012 on The Guardian Website

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