29 Jan 2020
The Third Sector is changing and with it the funding landscape. In this post, Northstar Investment Manager Peter Gilson answers some of the questions we regularly get asked about Social Investment.
The role of charities, social enterprises and not-for-profits has never been more important, however creating sustainable, long term, and self-sufficient organisations can mean developing a more entrepreneurial culture and exploring different, creative opportunities. Social Investment is one funding option that can really help enterprising organisations have that long-term future and security, but there is still some confusion or misunderstanding about what it is.
I hope some of your questions are answered here, but if you have any further just get in touch with us, we’re always happy to have an informal chat.
What is social investment?
Through the North East Social Investment Fund (NESIF) we provide social investment which is repayable finance to charities and not-for-profit organisations, with the aim of creating social impact.
We look to make investments that meet our aims to increase or protect an organisation’s ability to deliver social impact.
How is it different to other funding e.g. grants?
It is repayable finance, so organisations need to have long term planning that demonstrates it is affordable to them. It can also be much more flexible. Loans are unrestricted funds for the organisation rather than a grant for a specific purpose. So loan funding can be used for a wide range of purposes, including operational costs, working capital, asset purchases, or a combination of purposes.
Is it risky?
Like any loan, it is only risky if due diligence isn’t carried out and if key issues and questions aren’t addressed by the organisation’s leaders, trustees and others involved in the decision-making. Organisations really need to be focused on long term planning, with the necessary internal systems and culture that support this, and also looking to make profits that can be put back into the organisation to benefit clients.
Research suggests that many organisations actually benefit in the long run from going through the process of taking out finance, as it can lead to improvements in governance, internal management structures and financial discipline.
Is it expensive?
As Social Investors, our fund is not designed to lend to organisations that can get money through traditional bank loans, I.e. we are not in competition with traditional banks. We are in the market to support those organisations looking to become more resilient and sustainable but are unable to access bank loan finance, because of the perceived risk to a bank from such an organisation. The North East Social Investment fund’s rates are comparable with other Social Investors and reflect the fact that we borrow the funds from which we lend and also, through the interest rate we charge, cover our interest costs to our lenders together with the costs of running the fund.
Another aspect is that the pure interest rate charge is not the only reason to choose which lender to borrow money from – some lenders may offer a support package or a more relationship approach than others, but that may come at a premium on the interest rate.
In our view, the question is not just how expensive it is but rather ‘is the total package I will be getting good value?’
Is it complex?
At Northstar we try to make it as simple as possible. Most of us have borrowed money in our personal lives either through buying a house, a car, with credit cards, bank overdrafts.
Many of the questions we would ask ourselves are similar to what a Social investor asks of an organisation, e.g. Can you afford it? What percentage of your available income after your costs will be needed to cover the repayments? How certain is your income over the life of the loan? What are you hoping to do with the money? What benefit will this have on your organisation? What happens if.... ?
Our team works hand in hand with organisations to support them through every step of the process. By asking the questions we can get to know you and your organisation and how it operates. We can look at what you are hoping to achieve and how you intend to get there. This gives both of us the confidence that taking on social investment is right – in fact you can get our help way before you are ready to apply, and we will help guide you to shape your organisation and make it investment ready.
Occasionally, where we feel your plans and projections may need a little more work we can recommend that you seek additional support through a fund known as the Access Reach Fund. This would enable you to access additional expertise to help us both. For example – this could be to understand better how the income you are looking to generate can become more certain i.e. research into the market / to check your assumptions. It could also help with you understanding better the costs of capital expenditure as a check to ensure that everything has been covered
Is there much ongoing paperwork/ reporting once investment is made?
Once an investment is made we, as social investors, like to keep in touch. Generally, we will ask for quarterly management information. This is usually similar to the information you would provide to your trustees I.e. the financial progress of the organisation to show you are achieving what you hope to achieve financially. As social investors we are also very interested in the social impact you have on your beneficiaries and communities you support. This also helps us to spot and talk with you about any potential problems you may have and support you to resolve any issues.
If you'd like to find out more just get in touch with the Social Investment team, call us on: 0191 229 2770 or drop us an email: email@example.com