A guide to third sector trading - WCVA

It’s an idea, but is it business? A guide to third sector trading
1: Getting
started
2: First steps 3: Business
planning
4: Legal and
governance
5: Funding
and
resourcing
6: Financial
controls
7: Managing
growth
8: Management
and
governance
9: Social
enterprise
10: Sources
of support
• Loan repayments:
− Interest payments on loans must actually be paid to the
charity. This means they cannot be transferred to the
outstanding balance of the loan and allowed to accumulate.
− Loan agreements between charity and trading subsidiary
must be in writing and provide for the recovery of the loan.
Equity Investment:
• Equity investment by the charity in the trading subsidiary
must be within the investment powers of the charity and be a
commercially sound proposition.
Grants and donations: Charities can make donations to a trading
subsidiary – eg to pass on a start up grant made by an outside
funding body.
Guarantees: Charities may have the power in its memorandum
and articles of association to guarantee commercial loans to
develop trading subsidiaries. But there may be serious obstacles
to doing so.
• Commercial lenders may ask the parent charity to make the
guarantee if they regard the subsidiary itself to be an unsatisfactory
risk. But this could expose the charity’s own assets in a way which
is unsatisfactory to the Charity Commission – and if the investment
went wrong the trustees could be personally liable.
• An alternative is for individual trustees to make the guarantee in
a personal capacity, though they may be extremely unwise to
agree to do so.
• The problem may be avoided by securing loans from investors
who have an understanding of social enterprise, such as the
Charity Bank and the Local Investment Fund. These institutions
set out to lend to the third sector and as such are experts in
financing commercial venture development.
Transferring profits to the charity: Charities may prefer to pay
corporation tax on some of the subsidiary’s profits so that they can
hang on to finance to develop the business.
• This is because, if all profits are transferred as Gift Aid, the
subsidiary could become starved of cash and unable to take
advantage of opportunities to expand. This is not a remote
possibility. Careless Gift Aid donations can do serious damage to
a trading venture.
• On the other hand, if no profits at all are transferred to the
charity, the subsidiary company is demonstrably not fulfilling
its purpose of funding the charity, and the trustees will need be
careful about continuing to offer it support.
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