For love and money: charities with trading arms

Gone are the days when charities struggled through a hand-to-mouth existence, subsiding solely on one-off donations from local authorities and grant-making bodies. Many of today's third-sector organisations have evolved with a changing funding landscape to develop trading arms, generating their own income and making themselves financially sustainable in the process. By Libby Peake

In the past, charitable organisations had little choice but to fund all their endeavours by hunting down, applying for and obtaining grants. As many readers of The Waste Paper will appreciate, this can be both a   labour and resource intensive process, which often only yields short-term, project specific backing.

Uday Thakkar, Director of social enterprise consultancy Red Ochre, points out the weaknesses of relying on such a funding system: "The trouble with grants is that they always tend to be short term - you get grants for one year, two years, three years, and then you have to start the cycle all over again...which means that all you're doing is constantly going out and looking for grants.

"A lot of the grants are just project-related, so you get just enough money to deliver the project, so there's not enough money to cover some of the admin overheads. And, it also means that there also isn't enough money for you to grow and try different projects...Also, it's difficult to invest in your staff because every two, three years, they probably have to move on because you ran out of funding."

So, the natural step for many charities is to set up a trading arm and start generating their own income, often by opening a shop that sells goods or by establishing a subsidiary company that wins contracts and supplies services. This income usually supplements grant money but, given a bit of luck and (doubtless) a good deal of hard work, it could replace it altogether. Either way, it provides organisations with valuable benefits. As Thakkar points out: "If you can go out and generate some income for yourself, then you can try experimental things because it's your own money; you can use that money to cover your overheads which your grant might not let you do; you can invest long-term in your staff because you know you've got the money to keep them employed."

And now is the perfect time to act. Thakkar explains the changing funding scene: "There's been a push from local and central Government to get charities to deliver under contracts, under service-level agreements, or to compete against commercial companies to deliver various social benefits, which used to be things most charities did by being given a grant...

"Alongside that, there's a huge amount of funding available for organisations that want to start to go down that route, so that virtually every Government department you can think of has some form of funding set aside to help boost or start social enterprise activities." And, although high-street banks are unlikely to give out loans to third-sector organisations looking to branch out, funding bodies such as Futurebuilders England are crying out for community sector groups to apply for loan packages to develop their ability to deliver public services.

One charity that has been through the (sometimes stressful) process of setting up a trading arm is the Birmingham-based organisation Brumcan. It was set up in 1991 by CSV Environment and Friends of the Earth Birmingham to encourage greater awareness of recycling. The organisation was initially supported by the sheer will-power of its volunteers and then by grants from sources including the Government and the Lottery. In the late 1990s, the charity saw an opportunity to recycle paper on a commercial level and was advised by the Charity Commission to set up a separate trading company. So, Brumcan Recycling Limited (BRL) was born with the aim, according to Brumcan Chairman Mike Williams, of developing commercial services: "It would be able to actually make a profit and then those profits would then come back into the charity to support our education and awareness-raising work."

It has now been over a decade and the trading arm, though it occasionally causes headaches for the accountants, has had an overwhelmingly positive effect on the charity. David Armstrong, Business Development Manager at (BRL), explains: "What the advantage of having a commercial trading arm for any charity is that you've got a more sustainable income. You're not reliant on the behest of the council giving you contracts." Mike Williams adds that the organisation has been able to retain the benefits of charity status whilst developing a commercial arm and that the trading subsidiary has also occasionally helped "in terms of our image when dealing with outside companies, because I think that companies sometimes feel that charities are in some way less professional than commercial companies." The charity is still reliant on grants to fund some of its activities, but Armstrong is confident the organisation will eventually be self-sustaining: "The commercial trading arm will eventually completely fund the charity."

SHARP (Shelter and Housing Aid and Research Project) is a Leicester-based homelessness charity that also benefits from having a trading arm, STRIDE (SHARP Training, Recycling and Income Development Enterprise). SHARP has been operating since 1990, but in 2000 found itself in great financial difficulty. Phill Saunders, Managing Director of STRIDE, explains: "We lost our grant funding about eight years ago through local authority cuts and decided to try something different. And so we got involved in purchasing...catalogue-returned furniture and selling it on through a retail outlet. And we've grown from there."

The charity is still partially funded by grants, but it receives all the profits from STRIDE (which is no mean sum; STRIDE sells over half a million pounds of furniture a year) and the trading arm further benefits the community by running a vocational training centre for young people, working with long-term unemployed and offering placements for individuals on unpaid work orders. Saunders says of the relationship between charity and trading arm: "We've got as much social impact now; in fact, we're larger as a charity now...STRIDE complements what the charity does because they're trying to get people into housing and we're trying to get people into a job."

Of course, starting up a trading arm, like creating any business, can be a risky endeavour. Uday Thakkar points to the dispiriting example of Age Concern, a major charity that recently lost £5 million of its own funds and over £10 million of investments whilst trying to establish a subsidiary enterprise in the form of a members' club for people over 50. And Mike Williams, drawing on his extensive experience at Brumcan, warns waste management and recycling organisations in particular that: "The bottom line, which applies to the community sector as a whole, is it's actually difficult to make money out of recycling. So there are always huge risks...[a trading arm] can work, but it's not necessarily the panacea that's going to solve all your problems."

Any charity that wants to create its own income and break the hand-me-out cycle should certainly consider setting up a trading subsidiary, though, and should consider acting now. Thakkar warns: "The certainty of the favourable financial climate is not going to last too far into the future because if you look at what's happening with the economy, taxes are drying up, so the Government at some point are going to have to cut back on the amount of public spending...So, if people are thinking of doing something, this is the time to cash in on it. There's money there, there's encouragement, there's the political will to back you. And a lot of that may disappear soon."