Nothing ventured, nothing gained

As David Kershaw suggested at the recent Culture Change conference, “there’s no point existing if we don’t take risks”. Publicly funded arts organisations are in the business of taking risks; enabling artists to experiment and encouraging audiences to try new things is our core purpose. So why are we sometimes reluctant to trial new business ventures that could generate much-needed income for our organisations? Is it because we lack the confidence to use the financial tools that could help us? Because we fear that they are more risky than the grants to which we are accustomed? Because we lack the skills to adequately assess the financial risks of new ventures? At a time when arts and cultural organisations are looking to develop new income streams, many need ‘development capital’, the money required to invest in future capacity. Development capital can take the form of grants, the organisation’s own reserves, loans or ‘quasi-equity’ (also know as ‘profit-sharing’).

Mission Models Money’s (MMM) recent ‘Capital Matters’ report revealed a sector that is undercapitalised, holding on average six months’ expenditure in reserves, compared with 17 months’ in general charities. Reserves also tend to be seen only as ‘rainy day’ funds rather than for investing for new opportunities, although MMM recommends that this mindset changes. Sources of grant funding for developing new income generating activity are very limited. Increasingly, therefore, arts organisations are turning to finance providers for development capital.

PROFIT MARGINS

Unlike donations or grants, debt finance has to be repaid, with interest, so it only works to fund activity when income will be increased in the future – for example by expanding a building to sub-let space and generate rental income, or developing a new product which can be sold for a profit. Whereas for-profit companies will often sell shares to raise capital, charities cannot do this, and ‘quasi-equity’ offers a model where repayment is a percentage of future income – reducing the risk to the borrower as they only repay when the project becomes profitable.

The ‘Capital Matters’ case studies illustrate how, when used to develop new income generating activity, loan finance can enable arts and cultural organisations to become more financially resilient. Whitechapel Gallery borrowed £40,000 from Venturesome to invest in setting up the ‘Documents of Contemporary Art’ series, a new joint publishing venture with MIT Press. According to Tom Wilcox, then Managing Director: “The loan enabled us to launch four titles together, making it clear it was a series and attracting wider coverage, rather than having to produce one book at a time. The fact that it has been established as a series is the basis of its success and we’ve been able to repay the loan and produce 20 titles to date.”

BORROWED TIME

Venturesome, a specialist lender to non-profits, also supported The Leach Pottery in St Ives with an unsecured loan over three years (but repayable at any point without penalty) that enabled it to restructure its business model to generate greater income from trading, including online sales. A mixture of grants and loan finance are enabling Live Theatre in Newcastle to invest in a range of ventures including an online theatre-writing course (see AP233’s Money Matters) and a restaurant.

Before borrowing money it is important to be confident that enough profit will be generated to repay the loan through undertaking an ‘investment appraisal’. Alongside high street banks, there are a number of social investors which specialise in lending to non-profit organisations including Charity Bank, Triodos, Futurebuilders and Venturesome (part of the Charities Aid Foundation). Compared with high street banks, the interest rates of social investors tend to be higher, and some will be looking for evidence of social outcomes, which not all arts organisations can offer, but they offer a wider range of financial tools (including quasi-equity and unsecured loans) and a better understanding of non-profit business models and governance structures.

RISK ASSESSMENT

Borrowing funds involves both costs (arrangement fees and interest payments) and risks if repayments cannot be met. Arts organisations need to invest in their capacity to generate income. Finance is one source of development capital which, providing organisations have good financial management skills, can be used to grow new ventures. Developing reserves should be our priority to provide for future investment – but often the only way to do this is by generating a trading surplus. Some fear that funders will penalise organisations that hold reserves, but Arts Council England has repeatedly assured the sector this is not the case, and Charity Commission guidance also allows for reserves to provide for investment.

Finance is riskier than grants but it’s still a useful option. The biggest risk we face is doing nothing and thereby allowing our ability to take artistic and audience risks to fade away.