Big Society Bank quite small

Possibly the biggest revelation to emerge from David Cameron’s latest launch of The Big Society is the news that the much heralded, much lobbied for, Big Society Bank will open in April 2011 with ‘up to’ £100 million available for loans to the social sector.

Assuming that the figure does succeed in getting fairly close ‘up to’ £100 million, this is obviously a lot of money to you and me but it’s not a lot of money for an institution that was in theory meant to solve the problem of lack of resources for the social enterprises and other organisations tasked with building the Big Society.

It is, for example, less than the £180 million dished out by Futurebuilders, which the new government has closed. And Futurebuilders was a relatively narrowly focused fund – aimed at supporting organisations aiming to deliver contracted out public services. Communitybuilders is also currently ‘under review’.

While Monday’s announcement does contain the promise of lots more jam at some point when all the ‘unclaimed assets’ have finally been found and requisitioned, the short to medium term reality is that there’s going to be less loan funding available to enterprising social organisations than there was under the previous government.

I’m still yet to hear any clear evidence-based or strong hypothesis-based argument to back up the notion that the lack of available loan finance is one of the biggest problems we currently face but, given that ministers have repeatedly agreed with sector leaders’ suggestions that it is, they probably need to consider putting a bit more money where there mouth is. If not, they risk providing fuel for the fiery outbursts of those who claim that the Big Society is all about social enterprises and voluntary sector groups doing the government’s job with no resources.

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8 responses to “Big Society Bank quite small

  1. David
    £100m of loan finance – assuming it could be lent in one year – is equivalent to 0.28% of the voluntary sector’s income.

    Our analysis of balance sheet information on liabilites – which is for charities – suggests that they have loans worth £2.89 billion on their books. (That’s not a typo.)

    This is an estimate based on extrapolating data for 1994/95 and 2001/02. It’s a straight line extrapolation – therefore we haven’t factored in the changing environment for loan finance and indeed the changing culture. For what its worth, I think we fail to capture loan finance in the smallest organisations – and in some cases I suspect this is loans from trustees.

    We believe that most of this loan finance is for the purchase of buildings – ie its mortgages, not working capital. Our working assumption is of course that this is supplied by the mainstream banks, not social finance providers.

    I don’t particularly want to get into an argument about whether this is representative of ‘social enterprise’, but I think these numbers are a useful starting point for the discussion you’ve begun – a discussion that I very much agree needs more evidence to take it further. It’s possible to do more research here by the way, but it needs a bit of support and a lot of political oomph to make people share data…
    Cheers
    Karl

    Karl Wilding, Head of Research, NCVO

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  2. beanbagsandbullsh1t

    Karl,

    Thanks for this. I think we’re agreed on the Big Society Bank’s financial smallness.

    That’s said, that doesn’t mean it won’t have a big impact once there’s a clearer understanding of the specific problems it will be tackling.

    But you’ve also raised several other interesting points. The loans from trustees (or in social enterprise’s case, loans from Directors) is a very interesting one. I’d agree that I know of lots of this going on anecdotally and I’m sure there’s an interesting overall picture there.

    Then there’s underlying question re: the voluntary sector (to avoid the arguments neither of us want I’m lumping social enterprise in with everyone else) and its use of loan finance.

    Aside from in very specific cases such as Futurebuilders – where’s there was a clear link between the support offered, input from the end buyers of the services creating through working capital and the political intentions of the funding – I’m unconvinced that loans are a very good way for our sector to raise working capital in a general sense. I think serious evidence is needed to prove not just that there is demand (all of us want some money) but that satisfying that demand through loans is likely to useful and sustainable.

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  3. David

    I’ll declare our hand upfront as that of a social investor providing loans to charities and social enterprises, but one who agrees with much of what’s said here. More research is needed; our evidence is only anecdotal, but having provided £18m to some 250 organisations and spoken with thousands more over the past nine years, we see a lot of personal loans and other ‘hidden’ methods attempting to tackle what looks like a chronic shortage of capital.

    Is the lack of available loan finance one of the biggest problems the sector currently faces? It certainly is a key issue – funding is often cited by organisations as the major obstacle they face, and the word ‘funding’ often masks two different needs: that of income, and that of capital (be it working capital or development capital). Loans are not THE answer to the sector’s funding problems, but they are part of the solution. Paying a fair price for the services delivered by charities and social enterprises is another solution. Organisations would then be in a position to generate a surplus and begin to develop their own capital base. Another solution is tackling cultural attitudes that decry the notion of charities and social enterprises generating a surplus. Yet another is boosting the financial literacy of both recipients and providers of funding to help distinguish between income and capital needs.

    CAF Venturesome has been arguing this for some time (see our Financing Civil Society, 2008, available at http://www.venturesome.org). Loans have a role to play, in some instances providing a lifeline and helping deliver programmes that otherwise would not have happened. Without the kind of research Karl speaks of, putting a figure on how much is needed is near-impossible. And until we know the detail and final remit of the Big Society Bank, how much is enough is a moot point.

    Emilie Goodall, Senior Investment Manager, CAF Venturesome

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  4. beanbagsandbullsh1t

    Emilie,

    Thanks. You raise at least a couple more important but under-discussed issues.

    I agree about the word ‘funding’ masking different needs. I’m concerned that in recent years we’ve seen the promotion of the idea of loans replacing grants as a major source of development capital.

    One reason this is problematic is because, quite reasonably, even social lenders aren’t inclined to loan large chunks of cash to finance the development of financially risky projects – and even if they were, social entrepreneurs would need to be willing and able to risk their house to get the cash.

    But if we’re going to fund the development of stuff that hasn’t been done before there needs to be a mechanism for putting 10s of £1000s of start-up funding into projects that have a less than 20% of working financially but will be really good if they do work.

    The fair price for services is also a big issue.

    Partly because there’s still an alarming number of people – including people within charities and social enterprises delivering services, people using services and people commissioning services – who understand costs of service delivery based on the assumption that there’s an ongoing grant that pays the cost of an organisation having an office and a basic staff team and that they only need to charge/pay the direct costs on top of that.

    But this is a massive issue. It’s vital to avoid a situation where one bit of government is helping to facilities loaning organisations cash to start new ventures and other bits of government are forcing down payments for services to a level where there’s no way these loans can ever be paid even if the services are developed properly and delivered well.

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  5. Hi David

    I don’t think anyone’s been promoting loans in place of grants – the need for capital and the need for income are flipsides of the same coin. You can’t have a functioning civil society without both. No one wants to see a situation where loans are somehow seen as a substitute for income, or as a way to get off paying a fair price for services delivered. It won’t work.

    Regarding the variety of funding needs, when it comes to capital, different financial needs are best met by different financial mechanisms, from grants through to secured loans. You’ve hit on one of the big gaps – start up investment, which is by its very nature high risk. As such, grants or extremely patient capital are needed to meet these needs. Follow this link to a diagram of ours which tries to capture this point (the correlation between capital funding needs and funding types): http://www.slideshare.net/cafonline/financial-instruments-financial-needs

    As you rightly point out, it doesn’t make sense to meet high-risk start up investment using secured lending.

    The diagram also highlights that on the left-hand side of the diagram some of the need is being met by banks and specialist social lenders, which is really encouraging. On the right-hand side, there’s still a big gap. We’re keen to understand how a Big Society Bank might meet the needs of those on the right-hand side of the spectrum, given that some of the really high risk stuff will still need to be met by grants.

    I’m sure we both look forward to seeing what happens!

    Thanks,

    Emilie

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  6. beanbagsandbullsh1t

    Hi Emilie,

    I am looking to seeing what happens. The graph certainly confirms my – less informed – understanding of some of these things.

    I agree than none of the major non-state organisations giving out loans have promoted loans in place of grants.

    On the government side under New Labour, it was a very different picture. The Adventure Capital Fund (now Communitybuilders) have actively promoted the idea that loans are better than grants: https://beanbagsandbullsh1t.wordpress.com/2009/07/09/borrowing-the-future/

    Futurebuilders was partly based on similar logic.
    But I’m not arguing against what these organisations actually have been doing in real life.

    The problem is that government agencies – particularly councils – who’ve been slashing grant funding to voluntary sector organisations, have been encouraging those organisations (and people starting new community organisations) to change the way they do things, become social enterprises and a get a loan.

    Many social sector umbrella bodies have (possibly sometimes inadvertently) colluded in this by putting on a truckloads of events where social enterprises and voluntary sector groups are encouraged to turn up and find out about loans – which are relevant to a small percentage of established organisations and a minuscule percentage of start-up social ventures.

    Possible ways of selling equity have been mostly ignored. Start-up grants more than £5,000 are – so the rhetoric has gone – old fashioned things that don’t happen anymore.

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