Bonds and shares issues are still seen as tainted, capitalist concepts by many in the sector. But, for those seriously needing cash on board to take the business to the next level, these are becoming stronger options. "The bond market is a much less crowded space than the grant market," says Paul Harrod, CEO of housing renovation company Bristol Together CIC.
It's just one of the reasons the business decided to launch a £1.6m bond issue last November. The management team wants investment to buy new properties, expand its construction training scheme and employ more ex-offenders on projects.
So far, £600,000 of the bonds have been sold – predominantly to the Esmee Fairbairn Foundation. They'll be held over a five-year period at a rate of 3% interest a year and are insured against the company assets.
Bristol Together is one of a handful of social enterprises braving the bond market. It joins Pants to Poverty's which, in 2010, launched a £250,000 bond issue and offered to pay interest in the form of underwear. A Birmingham-based bakery and cookery school also launched a £25,000 bond issue last week, offering to pay interest in bread. This is on top of multimillion-pound bond issues by charity Scope and Housing Association People for Places in recent months.
Lydia Westmore, corporate finance manager at the Triodos Bank, who worked on Bristol Together's bond, says now is a good time to attract investors. "There was a period, when the economy was more buoyant and interest rates were higher … that social investments delivering a 3% per annum return (the average for a social enterprise), for example, were not such an attractive investment," says Westmore.
Now, such an investment is proving more alluring. Although, financial experts say that social enterprises will struggle to pay back both bond money and interest unless they have a lot of assets.
Jamie Hartzell, founder of the Ethical Property Company (EPC), a social enterprise that rents office space to the third sector groups, feels shares are more viable. His business has made six share issues in recent years, totalling £15m.
Like Cafedirect and Traidcraft, its shares are not listed on a stock exchange, but they can be traded through investment management company Brewin Dolphin. Hartzell is also working on a website for trading these kind of shares, called Ethex.
The entrepreneur prefers shares to bonds for several reasons, even if he describes issuing then as "a very, very hard process".
"We pay an estimated 3% interest," Hartzell explains. "Depending on our performance – but the money is ours, we don't have to pay it back. We also like the fact that we are giving ownership to more people."
Harrod, on the other hand, prefers bonds because if the company makes a good profit, it can be "reinvested, rather than given to shareholders". But also, as a CIC limited by guarantee, it is not legally allowed to issue shares.
For smaller outfits, "community shares" are proving a more popular option. More than 160 Industrial and Provident Societies have gone down this route. Most ask for less than £200,000, and sometimes as little as £8,000. However, FC United football club in Manchester is pushing the bar – it's nearly raised £1.6m.
Cooperatives UK, the Development Trusts Association and similar groups often help enterprises do community share issues, sorting upfront costs and fees in exchange for a percentage fee taken from a successful issue.
The shares are not underwritten, cannot be traded, and do not rise and fall. Many are issued to friends, family and customers and seek to grow the business's network, as well as its wallet. And each shareholder only gets one vote, irrespective of how many shares they have.
Joe Hasell, founder of Cultivate Oxford, a new venture which plans to run a mobile vegetable van, opened a community share issue last month and has already brought in £20,000 of the desired £55,000.
Those who buy community shares often accept there is a risk they won't get the money back, or won't get a profit, and are happy to support the business anyway. In theory, there should be some added incentives in the form of tax breaks to sweeten investors, but the rules are currently quite inflexible.
There is a big push from the sector to change the situation, however. Last month, NCVO put a paper to government asking for the breaks to work better for social enterprises.
It looks likely that bonds and shares could become a normal part of the social enterprise funding mix, particularly as many move away from wanting to deal with banks.
"The cost and availability of 'normal' finance is still a huge problem," says Dan Gregory, an independent financial consult for social enterprises. "But meanwhile, there is a quiet revolution taking place through the significant growth of community shares and bonds, alternative models of social investment and peer-to-peer lending – it can be easier and cheaper to raise finance from your neighbour than from a bank or venture capitalist."
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