Today is Local Charities Day, announced by the government to celebrate small, local charities and community groups. This offers the sector and the wider public a chance to focus in on the special contribution this part of the not-for-profit sector makes to Britain’s civic life, and Minister for Civil Society Rob Wilson is also encouraging people to donate to Localgiving’s #GiveMe5 campaign on the day, backed by match funding.

Small charities under £1m make up 97% of the sector. Many, though not all, of these are local in their operations, or perhaps retain one main office that they use to offer services more nationally. Others are the local autonomous branches of big national federations, like Mind or Age UK. They receive less press attention than the mega-large charities – understandable perhaps, but this can leave their successes in the dark, and they are more trusted than their national counterparts. They are often more volunteer-based, which roots them firmly in their communities and in some cases can mean they have less of a cost base.

Along with their contributions and unique strengths, the challenges local charities face can also be overlooked, and with it the help they need to adapt. Small charities have suffered disproportionately in the recent funding environment, seeing significant volatility and greater reductions in income than their larger counterparts, especially from public sources. This has led to social investment being suggested more as an option for small charities, but recent research by IVAR suggests that discussion and research around social investment, as well as design and accompanying explanations of investment itself, can leave small organisations out in the cold.

IVAR’s study also touched on the governance challenges in small organisations, and how these affect the appetite and eligibility for social investment. In our recent Good Merger Index, we found that merger is still a measure small charities tend to undertake due to financial distress, rather than as a result of forward strategic planning. In about half of the cases IVAR explored, something similar is true of social investment, with investment often sought as a matter of financial necessity or crisis (some stated they would have preferred a grant). The study further noted that this often brought to the fore issues around board strength, with trustees in organisations without much experience of investment often anxious at the possibility and investors sometimes requiring that boards recruit a treasurer with real financial experience as a condition for the loan.

On the other hand, going through a social investment due diligence process can present an opportunity for small charities to explore strategy and involve the board more deeply. Rather than be scared of the concept of social investment, investment readiness considerations can create valuable opportunities to fully review an organisation’s sustainability – is it generating a year on year surplus? Is there a way to diversify the organisation’s financial base? Is there a better way to manage working capital to maximise the cash position every month? Would the beneficiaries of the organisation ultimately benefit from the organisation expanding or diversifying into a new area or building? What social investors ask charities to demonstrate is sustainability, strong governance and ultimately the impact of the organisation, and although it itself won’t always be the best solution, it is a useful question to consider.

Trustees and leaders also need to understand how social investment is different from traditional loans, as well as from the grants that local charities are traditionally likely to be more versed in. And most of all, what they need is a specific investable product or service that makes it clear to investors where the money will be spent, how it will be paid back and what the impact in their local community will be.

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