Why has Resonance Enterprise Investment CIC become a CDFI and how does this bolster our mission of being a bridge between social enterprises and investors? Our Head of our Enterprise Growth Funds, Ollie Pollard, explains
At Resonance we have seen the increasing demand and need for social enterprises to access investment which will help them to boost their impact and make real change in their communities.
Mainstream finance is largely not an option for many social enterprises. Often the features of their legal structures are not understood, they are seen as too risky, or their impact is not valued.
In 2015, to address the gaps in funding, we developed two innovative opportunities to scale and formalise our enterprise growth investing into fund structures. We established our Health & Wellbeing Challenge Fund in partnership with Access, The National Lottery Community Fund, Big Society Capital and South West Academic Health Network.
We also set up the Bristol SITR fund which evolved into the South West SITR. It was one of the UK’s first Social Investment Tax Relief (SITR) funds, pioneering the new government policy, with our West Midlands SITR fund launching shortly after.
Both funds aimed to help dismantle poverty across the two regions and took advantage of SITR, which lowered the cost of loans for enterprises whilst enabling the potential for competitive returns to investors.
Since 2016, 28 social enterprises across both funds have received investment to help support their social impact ambitions. Between them the two funds have raised an impressive £4.76m from 168 investors.
Through our Health & Wellbeing Challenge Fund we deployed over £5m of blended finance and unsecured loans to a wide range of social enterprises making measurable positive impact to health and wellbeing across underserved communities in the South West.
Despite Resonance lobbying the Government to improve and extend SITR, the relief was scrapped in 2023. Working with SITR has given us a strong grounding in tax efficient investment structures.
Before SITR had formally come to an end, we were already planning our next steps to continue to match capital to enterprises. That’s where Community Investment Tax Relief (CITR) and Resonance Enterprise Investment CIC becoming a Community Development Financial Institution (CDFI) came into play with the launch our new Resonance Enterprise Investment fund.
CDFIs serve people, businesses and communities that are unable to get funding through ‘traditional’ lenders/banks. CDFIs advanced more than £228m to UK communities in 2021, a 32% increase on the year before. They lent £93 million to 3,260 businesses and start-ups in 2021, 6% more than 2020 (1).
Community Investment Tax Relief (CITR), a scheme introduced by the Government in 2003, encourages investment into disadvantaged communities by giving a tax relief to investors who invest into accredited CDFIs.
The CITR tax relief is available to individuals and companies and is worth up to 25% of the value of the investment in the CDFI. The relief is spread over five years, starting with the year in which the investment is made.
There are currently around 30 CITR accredited CDFIs in the UK (there are also other CDFIs which specialise in lending to individuals, and to which CITR does not currently apply). In 2022, accredited CDFIs raised over £23m to lend to businesses and social enterprises through CITR (2).
CITR is one of the main Government-backed tax reliefs that can be used for the charity and social enterprise sector. Resonance’s new Enterprise Investment fund allows Professional Investors* to access this relief through Resonance Enterprise Investment CIC which is an accredited CDFI.
The money is deployed as investments to social enterprises via four different accessible and flexible finance options. With CITR, investors can offset up to 25% of their investment against their tax bill. The tax relief is spread over 5 years (5% claimable each year) from the year in which the investment is made and their investment expected back within 5-6 years.**
With our new fund, we wanted to be more aligned with the social enterprises we support with their finance needs. Research from Beyond Demand proposed that that the need for patient, risk-bearing capital (quasi-equity like products) for social purpose organisations is actually much greater than reported demand, due to ‘demand-side barriers’ such as lack of awareness, understanding and access (3).
As well as preparing to launch a new fund, we have recently become a member of Responsible Finance, which calls CDFIs a “superpower” in finance.
Responsible Finance is the national membership body for responsible finance providers and has a vision to create a fair financial system in the UK by scaling up the community development finance sector. They say that enterprise lending CDFIs protect and create jobs, boost productivity, foster inclusive growth and facilitate enterprise creation.
Theodora Hadjimichael, CEO of Responsible Finance, said: “Resonance has an impressive track record in helping social enterprises to develop their businesses and maximise their impact. We’re delighted Resonance has secured accreditation for CITR, thrilled to welcome Resonance to our network of CDFIs, and we are excited by the launch of its new fund.
“Wherever they live, ambitious, purpose-driven entrepreneurs need the right kind of finance at the right time to start or grow their social enterprises and businesses. Community Development Finance Institutions are recognised for ‘outperforming banks’ in lending to the UK’s most deprived areas, financing under-served businesses, and helping social enterprises to increase their scale and impact.
“Already tens of thousands of social enterprises, small businesses and people thrive because a CDFI gives them the right support. But financial exclusion shackles millions of individuals and businesses. We are excited to continue closing the finance gap, unlocking untapped economic potential and creating social value opportunities.”
We felt now was the right time for Resonance Enterprise Investment CIC to become a CDFI for several reasons – one being that we are joining a strong and growing sector of 30 plus UK based CDFIs at a time we can see the community and sector developing well, but it still not where it can be - it can be a lot bigger.
Secondly, Resonance has always strived to be a bridge (not an institution) between like-minded investors and social enterprises and charities so that they can access finance to do more of what they do, have a greater impact, build their governance, capacity and grow sustainably. Social Enterprise UK’s 2021 State of Social Enterprise Survey found that 36% of responders cited obtaining finance as a major barrier to growth (4). We know the provision of flexible, affordable investment to social enterprises is as important now as it has ever been given the rising cost of living, navigating a post-lockdown world, an economic crisis and the transition to a low carbon economy.
With our new fund, we’re looking at supporting social enterprises focusing on three key impact areas:
This fund launch consolidates our years of learning and experience in raising investment from aligned investors, helping social enterprises to grow their business and impact in a sustainable way. We are really excited to keep this journey going as part of the CDFI sector.
There are more than 100,000 social enterprises in the UK, contributing £60bn to the economy and employing around two million people (5). They are at the forefront of putting people and planet first, driven by social and environmental missions to create positive change.
We aim to open up more capital to more social enterprises in the places that need it most through our CDFI. It will also give tax benefits to Professional Investors who want to back meaningful and impactful causes in their communities and across other areas of the UK.
You can find out more about the Resonance Enterprise Investment fund by emailing [email protected].
*Professional Investors are investors who qualify as FCA Professional Clients.
Nothing in this document should be regarded as constituting investment, taxation, legal or other advice. The value and availability of Tax Reliefs will depend on the individual circumstances of a prospective investor and may be subject to change in the future. Further detail on CITR can be found on the Government website: https://www. gov.uk/government/publications/community-investment- tax-relief-citr/community-investment-tax-relief-citr.
Capital at Risk
**The tax relief is available to both individuals and companies (subject to eligibility) and is worth up to 25% of the value of a qualifying investment into an accredited CDFI. The relief is spread over 5 years (5% claimable each year) from the year in which the investment is made into the CDFI. The CITR scheme is jointly run by HMRC and the Department for Business, Energy & Industrial Strategy (BEIS). BEIS is responsible for accreditation of new CDFIs and the ongoing management of the scheme. HMRC oversees the relief.
Resonance Enterprise Investment is an Alternative Investment Fund (AIF). It is structured as a Community Interest Company (CIC) and is accredited as a Community Development Finance Institution (CDFI).
Citation
1. https://responsiblefinance.org.uk/2022/05/changing-lives/
2. Statistics from Responsible Finance
3. https://shiftdesign.org/content/uploads/2020/05/Beyond-Demand-Report_Shift_EsmeeFairbairn.pdf
5. https://www.socialenterprise.org.uk/all-about-social-enterprise/facts-and-figures/
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Resonance Limited is a company registered in England and Wales no. 04418625
Resonance Impact Investment Limited, a subsidiary of Resonance Limited, is authorized and regulated by the Financial Conduct Authority (FCA). Firm number 588462.
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