In the second part of this article, Peter Gilson, Investment Manager at Northstar continues his insight on what social investors look for, and why.
In the first part of this article I looked at the first four areas which all social investors focus on to some extent:
- Getting to know the people running the business
- Getting to know the business
- Getting to know the market the business operates in
- What social impact do they make
The other key areas are:
What are they wanting to do with the money?
- What do they want the money for? It could be for example:-
- Purchase and development of an asset
- To cover working capital i.e. the gap between paying bills / wages etc and receiving income
- Needing to increase resources e.g. additional staff
- Take over an existing business
- Start a new trading business
- Does the use of the money fit with their mission and objectives? Has everything been taken into account e.g.
- Planning permission
- VAT implications
This enables us to understand what the organisation is wanting to do and whether it has covered all aspects of the requirement.
How much do they want?
- Can the business borrow – there are some businesses whose Articles / constitution expressly forbids the organisation to borrow
- Is it enough or is it too much – by gaining a feel for the people running the business we will be able to gauge whether they are asking for the right amount.
- Will the request leave the business short of money i.e. are they using some of their own reserves and if so what would happen if there was an unforeseeable delay or expectations were slower to materialise – better to have that bit extra and possibly pay back earlier than leave yourself short and have to request further funds. The latter could show a lack of planning / foresight by the people running the business.
How will the loan be repaid?
Here we start to look at the financials of the business both historically and projected, things like:
- What has been the organisations track record historically of creating surpluses
- What additional income or savings are likely to be seen as being generated from the purpose e.g.:
- If a new building will it create more space to deliver the services
- If new staff will they be able to provide more capacity to deliver
- Will the purpose create savings and greater efficiencies
- Will the purpose “swap” costs i.e. if buying a building that the organisation currently rents will the current rent be replaced by the loan repayment
- Social investors like to look at forecasted financials including cashflows, P & L forecasts, and the impact on the balance sheet going forward:
- What are the assumptions made in the forecasts – are they optimistic / pessimistic or realistic and why
- Is there a seasonality to the organisations operations and have these been accounted for
- Terms of trade – how long do people take to pay the organisation - are there some very poor payers what is the strategy for chasing the monies
- How quickly does the organisation pay its bills, how does this impact the cashflow
- If we are dealing with an organisations that buys and sells goods how much stock is held – are there any items that are slow to move or unsaleable.
Is there any protection for the loan?
• This is where some social investors will look to obtain a legal charge over the assets of the business as protection for the loan should things go wrong.
Not all social investors take security; our own North East Social Investment Fund only expects to take security on around 30% of all its investments and the bulk of these will relate to a property purchase where it is the property that is secured – similar to a mortgage.
This article gives a flavour of many of the discussions that we as lenders look towards to get to know the people and their business. The list is not exhaustive. Many of the questions can be answered in the business plan. However, Social Investors love to meet with businesses and get to know them first hand.
If you want to meet for a chat over a cup of coffee, just get in touch, we’re always happy just to find out more about you and answer your questions.