An individual may develop the most creative, timely business idea in the world, but it will remain an idea unless s/he can secure funding to make it a reality. For budding social entrepreneurs who want to help their community by setting up a business, this is no less of a concern.
Funding not only helps launch community interest companies (CICs), it can help a CIC grow and innovate so they can compete successfully against private limited companies, while still giving back to the community.
Funds can be raised for CICs by issuing shares, getting loans, mortgaging assets and securing grants.
Grants for community interest companies
One key way of funding a CIC is to apply to a philanthropic foundation or grant-making body. You can search for these through online portals such as Funding Central, UK Community Foundation and the Prince’s Trust. Your local council can also help in this regard.
There are a large number of applicants for every grant. It is important to target organisations whose mission, values and activities are most similar to yours.
Different funding bodies have differing criteria. Many appear to prefer to fund CICs limited by guarantee rather than those limited by shares. However, some choose to focus more on the business itself, its understanding of the market and its projections for the future.
Bear in mind also that although grants do not need to be repaid, the conditions attached to how the money is spent may limit how the business operates.
Issuing shares to raise money for a community interest company
CICs that are limited by shares may raise funds by issuing shares to private investors. However, the amount CICs can pay out in dividends is capped at 35 per cent of distributable profits. This may not necessarily be attractive for private investors looking for ample return on their investment.
Loans for community interest companies
The government allows CICs to borrow at commercial rates of interest. And there are some financial institutions who view social enterprise bodies very favourably. These include: Charity Bank, Triodos Bank, Co-operative and Community Finance, The Prince’s Trust and the Unity Trust Bank.
For those who struggle to get funding from mainstream sources, there are a number of government-backed alternatives. For example, the Enterprise Finance Guarantee scheme provides guarantees on loans to small firms all over the UK with viable business proposals that struggle to gain conventional finance because of a lack of security. Launched in 2009, the loans are provided by banks, but 75 per cent of the loan is guaranteed by the government.
Another route to getting loans for CICs is through Community Development Finance Institutions (CDFIs). These support social enterprises and offer a variety of services, including loans. The government provides relief to tax-paying investors who choose to invest in CDFIs. This ranges from five per cent of their investment per annum up to a maximum of 25 per cent.
A word of caution though – there is a limit to the loans that a CIC can take out. If a CIC has high monthly debt repayments, it would be harder for them to invest in their local community. This would mean that they are failing to fulfil their purpose and the CIC Regulator could choose to take action.
Tax relief for community interest companies
As of June 2019, the Inland Revenue does not offer any tax breaks for CICs. As such, there is no general exemption from VAT and CICs cannot apply for gift aid status.
However, some local authorities may offer Discretionary Rate Relief to CICs. As the name suggests, this is offered at the discretion of the council. This 20 per cent rebate off business rates is primarily offered to charities and non-profit organisations. As awareness of CICs grows, more and more local authorities are awarding such companies this tax relief.
Securing funding for your CIC
Clearly, there are multiple ways social entrepreneurs can secure funding for a CIC. Resist the temptation to apply for every source of funding available. Take time to find out more about different funding opportunities. Then focus on applying for those whose work and interest are similar to yours.
The importance of legal advice
The decision to form a community interest company should be taken very seriously, because once it is set up, the only way out is to dissolve the company and cease to exist or convert the CIC into a charity. All assets will need to be passed on to a nominated charitable organisation. It is therefore strongly recommended that an individual gets legal advice before forming a CIC.
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