Loan dangers

My Guardian piece on the Big Society Bank seems to have generated a fair amount of (mostly supportive) reaction so it my typically difficult way I want to start by partially disagreeing with myself. The Guardian’s sharp, engaging headline and intro serves to slightly over-emphasise my scepticism about the Big Society Bank. I am sceptical about the level of hype around the Big Society Bank – in both its current and New Labour incarnations – but I don’t think it’s a bad thing. In fact, I think it’s likely to be a broadly good thing (and the ideas shortlisted by Nesta all sound potentially valuable).

My main concern is that the Bank is likely to be a vehicle to perpetuate the misguided thinking on social enterprise finance that I discuss in the rest of the Guardian article. My contention is not that people coming up with ideas to achieve social change through new financial models is a bad thing, it’s that it’s a relative side issue in the discussions about how to support socially enterprising people to deliver positive social change in the UK.

At the start-up stage or in the early stages people need to work out whether there’s a need for what they do and whether there’s a market for it. Overdrafts can be very useful but generally, while I can think of lots of specific exceptions where a loan might be the right vehicle to undertake that process, these exceptions cover a very small percentage of the overall number of new or early-stage socially enterprising ventures in the UK right now.

Over recent years, it hasn’t been unusual to attend events on social enterprise finance where there’s been presentations from two, three, sometimes four different flavours of social enterprise loan fund but little or no mention of (declining in many sectors but still relatively extensive) grant opportunities or, more importantly, ways of getting up and running without significant start-up finance.

I agree with Rod Schwarz’s view that, in the case of the kinds of social enterprises that potentially would benefit from significant investment, a lack of social enterprise investment propositions is a bigger problem than lack of cash. And I also very much agree with the approach of Schwartz’s company, Clearly So, in seeking to match social businesses with people who are willing and able to provide the kind of finance that’s relevant to their specific needs – whether that’s donations, equity investments or loans. Loans are potentially helpful but they’re a tool, taking a loan is not a socially beneficial activity in itself.

Part of the trouble is that elements within the social enterprise lobby see the use of loan finance of proof of virility. Social enterprises take loans and pay them back because they’re real businesses not wussy charities that take just grants and spend them on helping people. And don’t we have a significant growth in turnover this year.

Social enterprises (or enterprising charities) striving to be sustainable businesses – or get as close to they can to being sustainable through trading – is a good thing. The problem is that the bit of it that really matters is being able to provide some goods and services that people want to buy. Specialist providers do offer something to businesses that have got there, need finance to get to the next level and can’t get it from mainstream banks – but the number of social enterprises in that position is far too small to justify seminars, conferences or flagship government policies.

While I accept that part of the difficulty is that you’re more likely to get a decent turnout at (even an ultimately useless) event called ‘how to get some money for your social enterprise’ than you are at event called ‘practical tips based on my really difficult experiences starting a social enterprise with no money’, I still think social enterprises support agencies, business support agencies and other state-funded advice providers have a major case to answer.

With the exception of SSE and Unltd, these organisations have shown a worrying lack of focus on either helping people to do stuff or putting them in touch with people who might be able to. I doubt this is through choice. It’s likely that it suited New Labour to fund a never-ending roadshow of mostly irrelevant financial products and inter-lobby networking. A key challenge for the current government is to make the Big Society Bank doesn’t contribute to more of the same.




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5 responses to “Loan dangers

  1. David, I can’t agree with the assertion that there’s a lack of social enterprise investment propositions, obviously, as I described one to you yesterday on the Guardian blog which would have created a franchise opportunity for every rural community in the UK to operate a community investment model to invest in CDFIs. We lost one of these in our community recently when what had been a flourishing credit union failed to recover funds from debtors.

    We weren’t pitching to an audience of social investors because there weren’t any to be found in 2004. We’d gone to some lengths to develop a business plan however and the copyright of that still stands, it could still be done if it were possible to find some solidarity.

    We fell back on the revenue generated from software development and pressed on taking the concept overseas to develop the strategy for Ukraine and a plan for social enterprise development which is now being undertaken by the British Council and East Europe Foundation assisted by Erste Bank and Price Waterhouse Coopers. If this had no investment potential, why on earth would they be doing it?

    Why above all would we be investing in a Big Society Bank, the concept of a social enterprise investment fund which was described in detail in that paper?

    If the proposition that the bottom line of capitalism could be altered to serve society was such a bad idea, what was David Cameron doing at Davos making a call for this? Why did OXSEF hold a conference to discuss whether this new capitalism was possible?

    So I don’t buy the suggestion that there’s a dearth of investment propositions. We’d already demonstrated by 2004 that funds leverage for a community microfinance bank in Russia could deliver full cost recovery and a social return.

    One of several impacts so far in Ukraine has so far resulted in an increase of domestic adoption by 40%. This is our tiny business investing in leverage for a social return without an elaborate finance product.

    I do concur with your comment about support agencies. I’d been writing to them, since 2006 and on the third attempt late in 2009, RISE-SW had replied to say that they were too busy preparing the SE Mark. If they’d have read the proven model I described, it might have only taken a few weeks to complete the work, without public funding.


  2. beanbagsandbullsh1t

    Well, I’m not knocking support agencies in a general sense. I think specialist social enterprises support agencies do lots of good work – at least SEL in London does – but when it comes to the issue of early stage finance (in particular) they’ve been caught up in a debate which is, at best, semi-detached from reality.

    The implied meaning of lack of investment propositions is not that there’s literally a lack of propositions but, and this was Rod Schwartz’s point, that there’s a lack of good investment propositions. This is a general comment not a comment on your proposals.

    (Almost) needless to say, I’m definitely not suggesting that the Mr Cameron was wrong about altering capitalism to serve society. He was entirely right. My position is that in order to do that the primary need at the moment is to develop better business models and better social businesses, not new financial instruments.


  3. Again I agree David, SEL were in fact the only agency that showed an interest in 2004 and read the proposal. They suggested some funding sources. One of their staff had been asking y advice on the construction of an e-commerce portal and they were happy to reciprocate.

    I wasn’t taking what you wrote as a criticism of our proposals or business models. You operate as a CIC, a concept that was already published on line in 2002 when first mooted by UK government and embedded in the 2004 plan. The concept was proven by the Tomsk Regional Initiative which was to introduce the moral collateral model of microfinance to Russia.

    What I’m focused on is ethics. We’ve published ideas on social business since 1996 in the spirit of sharing but defend copyright of our business plans for obvious reasons. What was prescribed in our 2006 work was a detailed prescription of how that could be done. It was focussed on helping tens of thousands of vulnerable children, not a bandwagon of politicians and consultants.


  4. Great article I could not agree more. I have set up a number of social enterprises and done exactly as you suggest, including getting overdrafts from a high street bank, working two jobs at once, etc.

    I feel increasingly in a minority at events about social enterprise and am engaged in philosophical discussions about ‘how social we are’ by people who I’m not sure have ever got a business (social or otherwise) off the ground from scratch.

    Bank support has been crucial. Now that I have done a few successful start-ups the bank are falling over themselves to offer finance and security is no longer an issue. It may sound old fashioned but a long term bank relationship is worth it’s weight in gold.


  5. beanbagsandbullsh1t

    Yes, I’ve often wondered whether – in some cases – people who talk about banks not understanding social enterprise are in fact really saying “banks don’t understand that social enterprises have a right to economically unjustified privileged status”.

    I’d guess that my business is less successful than yours have been but we’ve always got a fairly good deal from high street banks in terms of making invaluable but realistic overdrafts available to us.

    That said, if the Big Society Bank could find ways to make it easier for high street banks to lend to social enterprises that would be a positive intervention.


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