Social investment tax relief can be a useful tool to help charities to take on investment, says Simon Rowell of Big Society Capital.

Social investment tax relief is now just over one year old. A number of different charities have already taken on investment made possible by the new relief. The relief has also been a trigger for individual investors to sit up and take notice about how they can help address the financing needs of charities. It’s been a welcome start but clearly has yet to fire the imagination of charities across the UK. What’s missing is an appreciation of where and when it can help and, just importantly perhaps, where and when it can’t.

How did SITR develop?

SITR developed as a result of industry advocacy to ‘level the playing field’ for investment in charities. Over £10bn of risk capital has already been funnelled to traditional business through the Enterprise Investment Scheme (EIS) since its launch in 1994.

However, because of their legal structure, charities missed out. This led to HM Treasury undertaking a detailed consultation exercise that saw the first tax relief for social investment develop, based on EIS, to encourage individual investors to back the growth prospects of charities (and social enterprise) through offering loan finance. Importantly, it extends EIS by making unsecured borrowing eligible and the size of investment is currently being extended from approximately £270,000 to £5m, in line with EIS.

How is SITR currently being used?

SITR has been used in three different ways already, helping raise almost half a million pounds. FareShare South West raised a £70,000 loan, FC United of Manchester used it to raise £270,000 in loan notes, which are similar to community shares, and Ambition East Midlands and Aspire Gloucestershire have used it for two social impact bonds worth £150,000 between them.

These initial deals highlight a few of the different ways a charity could deploy SITR for its own purposes. It can be used to help:

Set up a commercial trading activity to help subsidise charitable services. FareShare used investment to finance its catering arm, Surplus Supper Club, which generates revenues to support their distribution of 83,000 free meals per month across the South West.

Buy community facilities. FC United of Manchester used investment (partly from SITR) to help build a new stadium which will be repaid through membership fees, merchandise and ticket sales, helping 2,000 local children and vulnerable adults.

Try out an innovative service. Ambition East Midlands and Aspire Gloucestershire both received up-front investment to offer intensive support for vulnerable young homeless people to provide accommodation, education, training and employment. These were part of a Government payment-by-results contract under the Fair Chance Fund.

What financing package can you get?

A charity looking to undertake any of these activities should see SITR as an option to consider. The early experience suggests that SITR investments can result in interest rates lower than could be achieved elsewhere, often by more than a few percentage points. The investment must also be held for a decent period, with a minimum repayment period of 3 years, although this has been agreed to be 4 and 5 years as well.

It also can be a complement to a package of other investment products, for instance, FC United of Manchester raised £2.27m of finance, with around 10 per cent from SITR, whereas the SIBs raised a minority of their investment from SITR.

It is a different fundraising approach, needing multiple individuals committed to reach the investment target rather than a single institution providing the whole lot. On average, there has been around 7 individual investors in each deal investing about £15,000 in each investment. Clearly, these individuals have significant wealth and financial expertise already, so could become strategic advisors with the organisations in the future. These are not yet ‘retail’ investors.

What financing does SITR not offer?

SITR does seem to work to facilitate raising risk capital to grow a charity’s operations. It is not however a ready source of mortgage finance, as social banks (like Charity Bank) can already do this at reasonable rates. It is not also designed for funding short-term property development where property is built and sold within two years. There are also a number of other activities which aren’t eligible for SITR, such as electricity generation where a subsidy already exists or lending to individuals. Financing for these activities, must be sought elsewhere.

Firing the imagination

It seems that SITR is working, and already showing some promise in supporting charities looking to grow, experiment or consolidate. Early evidence indicates that whilst this isn’t right for all charities financing needs, this new source of financing can become an attractive package. New individual investors may be harder to locate but also provide a new opportunity for engagement and advice. An interesting prospect, but probably still room for a little more imagination.

• Big Society Capital has launched a free service to help charities take advantage of SITR.