Expert view: Don't be afraid of investing in growth

Growing charities need money for a huge variety of purposes: to pay bills and balance income and expenditure; to underpin cash flow; to buy and refurbish property; and to invest in building capacity through IT.

Until recently, fundraised or grant income has had to tackle all of these.

But a charity can now explore a long-term loan for property acquisition from a mainstream bank or a third sector specialist, or an overdraft for working-capital purposes.

Both the supply side (banks and specialist lenders) and the demand side (charities and other social enterprises) are starting to recognise that the mechanisms are appropriate and not unjustifiably risky. If you borrow on a mortgage to finance your own house purchase, why argue vehemently as a trustee against your charity using a mortgage to acquire its property from a landlord? The risks of the long-term loan are balanced against the benefits of owning the property.

On the income and expenditure front, there is slow recognition by funders that core costs must be covered as much as the marginal costs of projects.

Larger fundraising charities are less vulnerable to stress and risks than smaller charities, which have to glean from their projects enough unrestricted income to meet core costs.

The next frontier is the supply of 'soft' development capital. For example, a charity may want to invest in IT or build its individual fundraising programme. These are riskier investments. What if either fail?

The first step is to assess the risk and reward to the charity or social enterprise as a whole. What is its overall financial position? What risks can it afford to take? How can it best use any unrestricted reserves?

The second is to decide what instrument to use to finance the investment.

A mortgage may be right for a property purchase, but 'risk capital' - using unrestricted reserves, obtaining the support of a sustained grant programme, a long-term patient loan or equity - may be needed for capacity building.

The challenge to grantmakers and specialist financial suppliers is to provide 'soft' development capital appropriate to those needs. There is also a need to build charity balance sheets. Too many smaller charities have minimal reserves, leading to stressed working capital and no development capacity.

But if funders need to start building balance sheets, social entrepreneurs must learn to stop spending all the money on the programme. Responsible financing will help build stronger, more effective charities

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