At Work: Finance and IT - Social investment - Funding method must match the risk

John Kingston, director of Venturesome

Ten years ago, most charities would fundraise not only to pay for their staff and other recurrent costs, but also for investment expenditure such as acquiring a building.

Today, recurrent costs still need to be met by fundraising income and/or income from contracts or trading activity. But what of investment expenditure?

A variety of financing options are now available, but what should you use and when?

Social investment aims to provide additional financial mechanisms to help charities grow while managing risk appropriately. So a charity wanting to acquire the freehold of the property it currently rents should investigate a loan from a main- stream bank, or a specialist such as Charity Bank or Triodos, rather than mount a big gift fundraising campaign for the full cost of the purchase.

Given the history of property values in the UK, and if rent has been paid on the property for the past 10 years, it is a reasonable risk to take on a long-term mortgage.

Similarly, to have an overdraft or standby facility from a clearing bank to underpin the fluctuations of cash flow could be helpful. But to take out a bank loan to finance the up-front costs of an open-air fundraising concert to be held in September, and with tickets sold on the night, could be disastrous. The risk and the funding method do not match.

If you require income to match recurrent spending, don't borrow - it's like paying food bills with a credit card. If you want to acquire assets, check out a long-term loan. If you need cash flow support to navigate the uncertainties of income timing (and not to finance trading losses) look at an overdraft.

But what about 'soft' investment, when you hire people, increase office space or buy IT? You invest today in order to build capacity for tomorrow, but this is riskier territory.

The 'supply side' of finance is adapting to meet this challenge. Grant-makers are developing their interest in funding capacity-building. The Impetus Trust, for example, uses the 'venture philanthropy' model to fund charities that are ready and willing to grow in a planned way. And the Adventure Capital Fund, Futurebuilders and Venturesome are exploring how debt and equity-like mechanisms can be used to help build strong organisations and increase their impacts.

The good news is that charities now have more options when considering how to finance development and growth. But social investment is not a panacea. It complements, not replaces, the vital role of grant-makers, and it will undoubtedly become more important in the funding mix for charities in the future.

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