What is the Community Business Investment Fund (CBIF)?

The principal aim of a CBIF would be to create a straightforward mechanism for local investment in local businesses. The idea would be to target businesses which are currently experiencing difficulties in obtaining finance through existing channels. However, the intention would also be to create a commercially sustainable model – an approach which might tolerate a different risk profile to current providers but would nevertheless anticipate a sensible overall return on capital.

It is feasible that a scheme (or sub-scheme) of this type might operate anywhere along the corporate capital structure, from equity through mezzanine finance to conventional debt, but the initial focus of our efforts has been on creating a conduit for lending activity. This said, there may be scope to explore alternative approaches at a later stage, depending on the feedback we receive.

Initial concept – raising the finance
Our initial idea is to create a small regulated fund which would have the ability to raise capital from sophisticated and high net worth individuals, companies, charities and the public sector. Suitable governance structures would be put in place to ensure appropriate oversight of the operation, possibly utilising Cumbria County Council infrastructure combined with a private sector support organisation. The fund would probably aim to generate a moderate commercial return – somewhere above bank deposit rates but below fully commercial lending rates – in order to have the flexibility to finance the infrastructure and provide affordable lending to end users. However, here we are very open to feedback – if investors are only interested in a higher level of return this may affect the feasibility of this approach. There are some tax-reliefs available for some of the lending approaches which could be employed (see below) which might impose some restrictions on the minimum lending term for the fund (perhaps up to 5 years), but using a fund mechanism may allow us to nevertheless create some potential for increased liquidity – this is another area where we are keen to amass feedback on preferences. We are also hoping to assess investor preferences on the cash-flow profile of the fund – would they prefer a regular income or are they happy with a capital return ?

Initial concept – applying the funds
Having raised capital to underpin SME finance needs, the key question is how best to deliver this funding to where it is most needed. It may be that we ultimately identify several mechanisms, but our initial focus has been on finding an approach which contains costs and utilises existing, tried and tested infrastructure where possible. Community Development Finance Institutions (CFDIs) are social enterprises which specialise in lending to the very sector we are hoping to target, and in Cumbria we have our own CDFI Enterprise Answers (EA, formerly CART), which has been profitably serving local businesses since 2005. We have consequently been exploring the potential to provide increased local lending using the credit processes, systems and operational infrastructure of EA, as a way of achieving economies of scale and avoiding the introduction of yet another independent channel which borrowers need to be aware of. EA has the added advantage that lending to it can benefit from a tax break – Community Investment Tax Relief – which can contribute to the overall return for investors.

Borrower needs
Although this concept has been born out of evidence that many small local companies are still facing financing constraints, we are also hoping that survey evidence will help us to better understand the precise areas in which the market is failing. This may further inform the final design of the delivery mechanism, and the types of capital ultimately provided, so we are particularly keen to hear from the types of companies who feel they are facing constraints in order to understand their profiles and needs.

If you have any further questions on the CBIF idea, please e-mail [email protected]