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Cliff Mills on the funding of social and mutual enterprise

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How are social and mutual enterprises funded?

All types of business need funding. They need start-up capital, working capital, and usually longer term strategic funding to underpin a business plan. Most businesses start small and grow slowly over a long period of time. Many of the social and mutual enterprises emerging from public service reform are people-based businesses, and seek to minimise the assets they own in order to limit their need for initial capital. They rely on securing, say, a three-year contract which provides the turnover to cover expenses over the early years. During this period they aim to build other sources of revenue and generate other income to build up reserves.

Inevitably, in order to get started they need to borrow funds from a bank to fund working capital, and they might secure some start-up or grant funding from for example the Social Enterprise Investment Fund or Investment Contract Readiness Fund.

It is difficult to start a business in this way, but where the promoters wish to pursue this approach rather than see a service transfer into private ownership there is little choice. The state cannot usually donate cash or assets to start the venture (it is normally contrary to EU law as state aid), and raising large amounts of new capital is extremely difficult.

What is the history of funding such enterprises?

In last week’s column we saw how the co-operative movement, which was arguably the original social enterprise sector, was funded by the savings of people on low incomes. Customers used their deposit account at the local store as a safe place to keep their cash. The result of this was the very rapid growth of co-operative capital. For example, capital held by the Rochdale Equitable Pioneers Society alone grew from zero in 1844 to £300,000 in 1880.

The funds raised were more than enough to fund the primary retail societies themselves, and soon provided the basis to fund a wholesaler (Co-operative Wholesale Society) which rapidly became an importer, packager, grower, producer and manufacturer. But capital continued to grow so it was also used by societies to fund new businesses. The weekly publication of the movement, the Co-operative News, became a vehicle for advertisements by promoters of new businesses looking for capital, and holders of surplus capital looking for new co-operative ventures to support.

There was the ability to establish new co-operative businesses which represent a coming together of capital (often provided by another society), labour and custom, each sharing an entitlement to profits. In other words, funding was available which supported the start-up of co-operative ventures, and which was consistent with the nature and social purpose of such organisations.

Why can’t we do the same today?

At the moment there are two reasons why we can’t, but this could change.

The first is that the potential pool of available capital (people’s savings for their later years, and other funds deposited to underpin insured risks) is mainly tied up in investments in stocks, shares and other financial instruments in privately owned corporations. The funds are tied up in these investments because the investors are looking for the highest possible rate of return (profit maximising), since that is the prevailing assumption about what such funds should be doing.

Even if we wanted to do something different with those funds (and many people do), it is difficult to do so today because there is no obvious financial instrument that provides an alternative. A hundred years ago, people deposited funds as “withdrawable share capital” in co-operatives, but this does not provide an effective way to fund a business today. It is too uncertain a basis for funding a large business, because depositors can just withdraw their funds, the amount of shares any person can hold is limited by statute, and it struggles to meet the needs of modern regulated financial services. Withdrawable shares are still used for community share offers and smaller scale local fund-raising, but something more robust is needed for larger businesses, a new type of financial instrument that would provide long-term support and funding to a social or mutual enterprise consistent with its values and principles, but which would also give an ‘exit’ for the holder of the instrument who wants to realise their funds.

A private member’s bill – the Mutuals’ Redeemable Shares Bill – currently seeks to achieve exactly this; to enable social and mutual enterprises to raise capital that will support the social purpose of the corporate entity, and to enable the individual to withdraw their funds at particular times when needed through such instruments as term shares.

What difference will this make?

At present, it is virtually impossible for me to use part of my retirement savings to support local public services, to enable different types of social or mutual enterprise to emerge which have a fundamentally different corporate purpose from traditional private enterprise.

Generally, the new emerging social and mutual enterprises only have nominal share capital, because the law currently does not provide them with a ready mechanism to raise funds which support their social purpose, and which provide an exit for savers.

This draft legislation could change that, and enable housing associations, healthcare providers and other social and mutual enterprises emerging from the public sector to raise funds from their local communities to support a broader social purpose.

For the draft legislation to become law, it needs to secure broader political backing. If you would like to support this initiative, go to http://www.mutuo.co.uk/category/mutuals-redeemable-shares-bill/ for further information about the bill, and a draft letter to your MP drawing the matter to their attention. Many individuals have already give the bill their support, but this would be greatly enhanced by support from individuals within the public sector.

Next week’s final article in this series will look at the challenges for those of us committed to supporting the creation of social and mutual enterprises.

Cliff Mills, consultant with Capsticks and principle associate with Mutuo

For more insight into the history, see the Co-operative Heritage Trust archive

This is the twelfth article in a series. For the other articles visit LGCplus.com/SocialEnterprise

In association with Capsticks

Capsticks

Topics in this series were agreed in partnership. Articles were supplied by Capsticks and edited by LGC.

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