The Big Society Capital could work, but only with guarantees from the government, says Phil Shanks.
We need a big guarantee
The head of the Big Society Capital states that social enterprise does not get support from banks because they have few assets, but banks deal with this everyday by way of ‘personal guarantee’.
The simple fact is that a loan will not be granted based on a borrower’s assets; they must prove their ability to service a loan, just like you or I when we take out a mortgage.
The reason banks are reluctant to lend to social enterprise is because they see the source of funding - whether by grant or local government trading relationships - as high risk.
Governments frequently reorder their priorities with scant regard for social enterprises who are delivering public services, so when their funding is cut both they, and the banks are left high and dry.
In such a situation, the bank is left in the position of having to foreclose on a not-for-profit organisation which does no favours for a lender’s reputation. If the government really wants Big Society Capital to work they will have to provide a guarantee to secure the funding which services the loan.
Just because this is a government initiative it does not exempt it from the need for guarantees and no investor with sense will back it until the issue of security of income is addressed.
We have created the SAF Housing Real Estate Investment Trust in order to tackle precisely the issues that Big Society Capital is looking to solve. Ours guarantees cash flow for the lender/investor and thus lowers the borrowing rate for social enterprises and local authorities.
We buy insurance to pay for rent arrears and local authorities guarantee rents will be paid. This makes the loan from the REIT more serviceable, and consequently it becomes a more sensible investment for pension funds.
I commend all efforts to bring private sector investment to do a public good; the real problem is and always will be the transient nature of policy decisions made by government.
Unless they underwrite the risk that they themselves may at any time remove the central or local government funding from which these social enterprises must repay their loans, I don’t see how Big Society Capital can provide financial support at affordable rates.
Phil Shanks is founder of SAF - Housing Solutions and former advisor to local authorities. email@example.com