This is why \”social enterprises\” might not work

The government\’s controversial welfare to work initiative has suffered another blow after it emerged that a social enterprise firm hired to get the long-term jobless into employment has gone into liquidation, claiming banks refused to lend it money to stay afloat because they considered the work programme to be too financially risky.

Eco Actif, a community interest company based in Sutton, Surrey, closed suddenly on Friday morning. It provided employment support for around 500 people in the south-east of London, operating as a subcontractor in a regional supply chain headed by the welfare to work company A4e.

Its chief executive, Amanda Palmer-Roye, said Eco-Actif had performed well in getting people into work and had a £1m order book but had been unable to raise the capital to sustain itself under the government\’s payment by results system, under which firms must wait 18 months between delivery and payment.

You need capital to be able to run an organisation. Doesn\’t matter whether you are a for profit or a not for profit. You still need capital, working capital at the very least, to cover the gap between expenditure and income.

And the problem with a not for profit is that, well, how do you pay for the capital? With a \”social enterprise\” (I think this means no nasty outside shareholders, right?) where\’s it going to come from?

This is a problem that all mutuals, worker owned companies etc face. You need capital. Where\’s it coming from?

9 thoughts on “This is why \”social enterprises\” might not work”

  1. Since this is a ‘community interest company’ (a CIC), it can be ‘for profit’ but the distribution of those profits is constrained by the social purpose in the mem. & arts.

    The problem here isn’t the nature of the company but the problem with biting off more than you can chew. Put simply the organisation has insufficient assets to give the bank confidence – even though their track record suggests a decent return.

    The big problem for mutuals (and for organisations like this one) is that borrowing is the only option for raising capital. A wicked, evil joint stock company can always issue shares.

  2. Tim your comments make sense regarding equity. But what about debt capital what are your views on that?

  3. 1. What was the business plan from the off?
    2. How long had they been running?
    3. How have they been financed to date?
    4. A4e has a poor track record.
    5. The 18 month lead time is to stop fraud.
    6. The ‘million pound order book’ sounds questionable.
    7. a ‘mutual’ should be that: the owners are the investors, their rights being to their loans and a reasonable interest rate, but no capital growth.
    8. It sounds more like an unsuccessful attempt at subsidy farming.

  4. I suppose their mistake is to call themself a social enterprise rather than a social media enterprise. I suppose if they have called themself facebook for the jobseekers than they would have got some money (in the form of debt, preferred equity with profit sharing ?)

  5. ebm,

    The thing with Facebook (following up Simon Cooke’s point) is that like most .com companies, they are funded by venture capitalists who get a share in the business.

    Another thing (and this is a more general point about banks vs VCs) – banks are very risk averse. They really only like lending against property.

  6. Having a full order book is not that same as having a future profit.

    That’s why these things don’t work, those running them are subject to wishful and woolly thinking. Make them put some equity in, lenders tend to bit more amenable when those looking to spend the bank’s money also have skin in the game – makes them concentrate.

  7. It might also be that with all the flak about welfare to work, the banks don’t trust the government to still be paying up at the end of the project.

  8. A million pound order book does not equal a million pounds in turnover in this case. Part of the payment is based around the individual still working at certain point in time – including 18 months. Something the community company cannot guarantee.
    I looked into the scheme for the charity I worked at back when it was put together as a scheme, risk/reward is problematic unless able to charge a fortune for each long term employee placed.

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