CEDTAP Forum 2000
Proceedings: Financing CED

Below is a summary of five presenters who shared their insights on diverse aspects of the finance issue, including finding resources for enterprise development, the expectations of funders, bridging the gap between mainstream investors and CED, creating local solutions for development finance, and working ‘community to community’ to build capacity and scale. 

Finding Resources for Enterprise Development

Marty Frost, a British Columbia CED consultant, mapped the terrain groups enter when seeking to develop a community enterprise. He drew on his experience in co-op development and on his participation in Enterprising Non-Profits, an exploratory project in which 10 non-profit organizations each sought to develop a for-profit enterprise.

A major challenge encountered by non-profits is finding the money they need to develop their proposed venture. Mainstream financial institutions typically are unfamiliar with the ‘non-profit model’ and struggle to conceive of such organizations as sound business partners. Given that there are always other, more conventional investment opportunities, mainstream investors often do not seriously entertain proposals from non-profits. To be considered, non-profits need to devote additional time and resources to orienting potential investors to their work.

Frost observes that non-profits tend to be most successful securing financing from the small, but growing, number of ‘social investors.’ These can include:

• Community foundations that channel local resources to community needs.
• Alternative investment funds designed to make investments that serve specific social goals—e.g., the Worker Ownership Development Fund.
• Personal investors who actively seek ways to use their resources to achieve social as well as economic goals.
• Community members who come to identify with a particular initiative and agree to invest in its success—e.g., staff of the enterprising non-profit; members of a community who rally behind an important local enterprise; the ‘angel investor’ inspired by the aims of a particular venture.

Such investors bring a ‘secondary agenda’ to their investment considerations. While seeking some financial return on their capital, social investors are also interested in using their investments to achieve social goals.

Social investors may also play a crucial role in helping a non-profit obtain loans from conventional financial institutions. While organizations can secure mortgages without great difficulty from these institutions, business loans tend to be more difficult to arrange. In some cases, innovation on the part of the project and flexibility on the part of the lending institution are needed to create deals that work. Frost related an example in which more than 30 individuals each identified a small asset that could be used as security. With the co-operation of a local credit union, papers were drawn up for a single loan backed by 30 separate pieces of collateral.

Funder Expectations: The Social Investor’s Point of View

The vantage point of the social investor was discussed by David Driscoll, Executive Director of VanCity Community Foundation. Social investors such as VanCity are consciously seeking to realize multiple bottom lines. For Driscoll, this means attending to such objectives as equity, solidarity and social justice in addition to the financial aspect of the investment. Building social capital – the values, attitudes and relationships which enable people to work together for the common good – is a step preceding the development of economic capital. Social investors acknowledge this social foundation and are committed to strengthening it through their investments.

In dealing with social investors, Driscoll says it is important that CED practitioners articulate clearly the distinctive nature of their work. Essentially, CED proponents are ‘selling’ a product; investors are ‘buying.’ Investors need to be convinced that proposed projects serve the purposes their investments are intended to achieve.

VanCity assesses proposed investments according to two sets of expectations, one pertaining to ‘process’ considerations and the other to matters of ‘content.’

Process considerations refer to how prospective partners can be expected to conduct themselves during the project. VanCity wants to be confident that its partner is acting in good faith. In support of this good faith, it wants to see a well-considered business plan. It also seeks what Driscoll refers to as ‘mutuality of risk,’ a partner’s willingness to invest resources in the effort. VanCity expects that its partner will fully disclose information relevant to assessing the viability and progress of the venture. It needs to be confident that if the project runs into difficulty, its partner will work through those challenges and honour its commitments as much as possible. Finally, VanCity expects that partners will recognize one another’s contributions and that this social undertaking will be both valued and celebrated.

Beyond these process considerations, VanCity does expect certain substantial outcomes from the project. First, it seeks some level of financial return on its investment. However, it also expects its investments to contribute to the development of civil society, including the strengthening of organizational and community capacity. Specific social benefits, such as housing or jobs, are also sought. Finally, it wishes to see evidence of the project’s sustainability. VanCity considers itself to be engaged in ‘development’ work, not ‘aid.’ It aims to build the capacity of individuals, organizations and communities to effectively meet their own needs on an ongoing basis.

Mainstream Investors and CED: Bridging the Gap

Although social investors are an important source of financing for CED ventures, mainstream investors should not be ruled out. After all, the resources of mainstream markets far exceed those committed to social investment.

For Joel Lebossé, CED practitioners and mainstream investors are separated by a ‘gulf,’ the former oriented to social and the latter to business development. As a former banker who now works extensively with CED groups, Lebossé has an intimate understanding of both perspectives. He offered his impressions of the two realities and suggested ways to ‘bridge the gap.’

While agreeing with Frost about the need to orient conventional investors to the distinctive character of CED work, Lebossé suggests that non-profit groups might first establish their credibility with investors on purely business terms before introducing social development issues. In the eyes of traditional business people, the non-profit sector is often perceived as lacking the organization, know-how and discipline to be effective business operators. Non-profits may have to do their homework on the business side of the equation in order to get a hearing for the social side of their work.

According to Lebossé, a survey conducted with community-based organizations in the province of Québec revealed that the major problem facing these organizations is communication with financial institutions. In his view, the difference in outlooks between ‘bankers’ and non-profits should be seen as an opportunity for learning. He suggests that bankers be engaged as advisors who can bring their financial and business expertise to the non-profit’s work. He reminded workshop participants that bankers are citizens who share concerns about local issues, value contributing to community projects and appreciate being acknowledged for their efforts. Building a relationship with individuals in the financial sector based on their interests and abilities creates a foundation of respect, trust and mutual understanding that is a prerequisite for partnership-building.

Local Solutions for Development Finance

Frustrated at being unable to obtain financing for various types of CED work, many communities have opted to create their own local financial institutions. While helping to finance CED activities, these structures also struggle to meet their own financial needs.

François Lamontagne, consultant with the Ottawa-based New Economy Development Group, presented three case studies from Atlantic Canada. New Brunswick’s Société d’aide au développement des collectivité de la Péninsule acadienne (SADC) was established as a ‘Business Development Centre’ under the federal government’s Community Futures program. Cape Breton’s Banking Community Assets (BCA) Holdings was formed to create employment and maintain local ownership of local businesses. Calmeadow Nova Scotia emerged as an attempt to ‘scale up’ a highly successful peer lending initiative the Calmeadow Foundation had undertaken in Shelburne County, Nova Scotia.

Although these organizations had different origins and mandates, they generated some common lessons.

Local financial institutions can make a substantial contribution to the local economy. For instance, between 1988 and 1998, SADC made 254 small business loans, invested $7.3 million, leveraged $12.7 million in additional investment, created 396 jobs (full-time, part-time and seasonal) and maintained 1,017 others.

• Although difficult, local financial institutions can achieve some level of financial self-sufficiency. SADC received modest core funding from the federal government for approximately 10 years, enabling it to operate with a small but stable staff and gradually build up its investment fund. In recent years, it has shifted its investment focus from start-ups to expansions and consolidations. It has also diversified its revenue stream by entering into fee-for-service contracts with federal and provincial governments. BCA, on the other hand, has not received government funds for operating expenses. Rather, it operates with a minimal staff, relies heavily on volunteers and on strategic partnerships with other local organizations.
• Access to volunteers and the ability to partner with existing community organizations contribute to the efficiency and effectiveness of these financial institutions. All three organizations drew upon knowledge of the local context to make successful investment decisions. Partnerships with other local organizations also reduced operating costs and provided access to expertise and infrastructure from meeting space to accounting services.
• Government can help facilitate the development of such structures. It may provide financial support over an extended period of time as it has with organizations like SADC. In the case of BCA, it funded a feasibility study that led to the creation of the organization. It also provided a $500,000 five-year, interest-free loan that enabled BCA to make a number of initial investments.

It must be noted, however, that there are limits to what can be expected from local financial institutions. For instance, Calmeadow Nova Scotia sought to deliver micro credit services on a self-sustaining basis. Despite efforts to streamline its operations and diversify its product line, it was unable to become financially self-sufficient. The costs of servicing micro loans and providing personal and technical support make it difficult, if not impossible, for such funds to be financially self-sustaining. It should also be noted that most local financial institutions are primarily involved in conventional small business development, and not in financing larger-scale community enterprise.

On this point, Joel Lebossé added that community loan funds are increasingly being forced to operate as ‘investment funds’ rather than as the ‘development funds’ he believes they are. The personal and technical support community loan funds provide to borrowers is costly to provide, and funds cannot hope to generate sufficient revenue to pay for these services. Either there must be some other source of financing to cover these operating costs or the very role that gives such funds their true value is undermined.

Working ‘Community to Community’ to Build Capacity and Scale

Strategies for expanding the scale of CED work was the theme of the final workshop presentation. Having led CED organizations (CEDOs) in Ottawa and Victoria, consultant Sandra Mark knows that there are many worthwhile CED ventures to be pursued in large urban centres. The success of such ventures is doubtful, however, unless adequate infrastructure is in place to support them. In her view, what is needed in cities is something like the Community Futures Development Corporations (CFDCs) which serve as the core development structure in many rural communities. Recognizing that there is more than one route to develop such a structure, Mark and her colleagues chose not to focus all of their energy lobbying government. Instead, they took steps to work ‘community to community.’ CEDCO Victoria and its counterpart in New Westminster, the New Westminster Community Development Society (NWCDS), struck up a dialogue with Community Futures organizations in rural BC.

In British Columbia, CFDCs have already expanded their own clout and capacity by working in partnership. Several years ago, CFDCs throughout the province decided to pool their financial assets to create a single large fund from which each organization draws. CEDCO and NWCDS were interested in exploring whether they might become affiliated with this fund.

As discussions evolved, it became evident that rural and urban CEDOs might collaborate around more than finances alone. Each had distinct areas of experience and expertise. Rural CEDOs, for instance, had developed know-how in the area of investment and lending while urban CEDOs were experienced in providing technical support to various marginalized groups within the community. Expanding the CFDC partnership could involve sharing these capacities and further expanding the fund.

While a final agreement has not yet been reached, Mark is optimistic that one will be forthcoming. She emphasizes the strategic value of communities working together. By pooling resources, CEDOs can reach a scale of activity that commands the attention of other possible partners, including government and corporations. From this position of strength, the CED sector will be better able to attract additional resources to support its work.

This summary was written by Eric Leviten, a Research Associate with the Caledon Institute of Social Policy.

Challenges

• our values are being challenged:  community vs. business
• we are in danger of having our community work being co-opted by the business sector

Opportunities

• we have developed know-how, skills and relationships between partners:   provider-community-funder
• there is a growing number of financing sources available
• the social side of CED has business expertise

Workshop Presenters

Marty Frost, Human Ventures Consulting; David Driscoll, VanCity Community Foundation; Joel Lebossé, Pythagore; Sandra Mark, Community ReGen Services; François Lamontagne, New Economy Development Group