Repayable finance is not an appropriate funding model for all charitable organisations, a new report warns.
Research from New Philanthropy Capital and Social Investment Business has found that grant income should remain a permanent form of funding for some charities, social enterprises, community interest companies and community benefit societies.
The report lays out a framework for directing finance more effectively across the impact economy. It aims to help policymakers, funders, investors and sector leaders distinguish between different forms of finance and direct the right capital to the right organisations.
It builds on a previous report from NPC, which estimated that the impact economy contributes £428bn in gross value added to to the UK’s overall economy, amounting to about 15 per cent of GDP.
Impact UK, which was published in February, described the impact economy as “an ecosystem of individuals, organisations and capital intending to prioritise public benefit over private gain”.
The latest report splits the impact economy into five categories, with most charities falling into the two “regulated” categories – meaning their mission is protected by their legal form.
This includes the “grant-sustained regulated impact economy” and the “investable regulated impact economy”.
Organisations that fall within the former category have grants and donations as their primary funding source, while their trading income is “insufficient to service repayable capital”.
The latter category consists of organisations that have a surplus that is “recycled wholly or mainly to social or environmental mission” and have an investment capacity that is sufficient to service repayable capital.
The report says a significant part of the impact economy is “made up of organisations that are, and should remain, funded wholly or mainly by grants”.
It says: “Treating them as if they are simply at the early stage of a journey toward repayable finance gets their economics wrong and leads to the wrong policy responses.”
Grant-sustained organisations are not investment-ready organisations that lack technical assistance, the report says.
For these organisations, a positive financial return is “structurally impossible, given their mission, their service population and the nature of their work”, it suggests.
“A peer support group for people with severe mental-health conditions, a foodbank, a refugee welcome project or a village hall committee may create huge social value, but they are not set up to generate trading surpluses,” the report says.
“That value is created through voluntary effort, public grant and philanthropic giving, not through a market model.”
Other segments of the impact economy described in the report include the “member benefit economy”, which are organisations with structural member ownership qualities such as worker cooperatives.
The report discusses the self-regulated impact economy, which are purpose-aligned organisations that operate for profit, such as B Corps and purposeful businesses, which are not held to their mission through a legal structure.
It also mentions the “commercial economy”, which consists of for-profit organisations that do not hold themselves to purpose-driven objectives.
David Neaum, a senior consultant at NPC and author of the report, said: “The impact economy needs clearer language if we want better decisions about policy, funding, finance and infrastructure.
“This framework is about matching different types of support to different organisational realities.”
Geneieve Maitland Hudson, deputy chief executive at Social Investment Business, said: “Understanding these distinctions is essential if policymakers want to align finance, policy and support with the organisations best placed to deliver impact at scale.”