How to Lend Money to Charities, with Holger Westphely
Now, here is a topic I didn’t see coming. But why lend money to a charity, isn’t that a bit mean, to ask for your money back if they’re doing work you believe in? I spoke to Holger Westphely, Acting Head of CAF Venturesome, to find out how and why loans are sometimes better than donations.
It's very difficult to raise grant funding for anything that isn't directly related to a charity programme. Anything that has the word 'admin' in it is an anathema to many philanthropists. And that's where we come in, because we believe that a well run organisation needs OpEx, it needs CapEx… Secondly, from a philanthropist point of view, it can help the capital go further
And you can hear more of that on today’s episode. As mentioned, you can learn more about CAF Venturesome at www.venturesome.org and more about the parent organisation at www.cafonline.org
Holger also mentioned two very worthy causes in this chat, and you can learn more about both on each of their homepages - Ubuntu Pathways is at https://ubuntupathways.org/ and the Peaceful Change Initiative is at https://peacefulchange.org/
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), while you can find my action-adventure novels on Amazon, some versions even for free.
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Regards,
Brendan
The full written transcript, with timestamps, is below:
Holger Westphely 0:00
Anything that has the word admin in, or opex, is an anathema to many philanthropists. And that's where we come in, because we believe that a well run organisation needs opex, it needs capex, it may need to build infrastructure which it can then leverage to deliver impact and its programmes more efficiently, more effectively. So we take the opposite approach.
Brendan Le Grange 0:30
Now here is a topic I never expected to be covering on the show, how to lend money to charities. But it turns out it's a thing. And as soon as you take a minute to consider why, it all makes sense: raising money on an idea alone can be hard, just ask any entrepreneur. People want to see a project, hold it in their hands as it were, before handing over the big cardboard cheque.
So we're faced with a familiar catch 22: charity projects can't get funded because they aren't live, and they can't go live because they aren't funded. Enter the Charities Aid Foundation with their social investment arm, Venturesome. Welcome, to How to Lend Money to Strangers with Brendan Le Grange.
I've worked in financial institutions of various sizes for the last 20 years and across three continents, and always the community building work we have done has been pretty hands-on, either providing the staff as labour for things like a team day-out to help clean up the garden of a local children's home or at best leveraging the passion and fundraising networks of the staff with a matching programme. One of my last acts before leaving South Africa was to arrange a group cycle right from Johannesburg to Big Bend on the eastern border of Eswatini (Swaziland) and Mozambique, with funds raised by us being doubled thanks to the generosity of Standard Bank.
Still, that doesn't feel like it's fully utilising the power of a financial institution, not leveraging its knowledge of how to lend money to fuel growth. So this is a topic I'm very interested in.
Holger Westphely, it's a pleasure to have you on the show. You are currently acting head of CAF Ventureseom at the Charities Aid Foundation. But looking at LinkedIn, you started your career in private banking for high net worth individuals and in management consulting - so at that point, probably the more common career path would have been to continue in that corporate/ finance world. What inspired you to shift and to pursue a social impact instead?
Holger Westphely 2:45
Yeah, I always had an interest in business and financial markets and how our economy works. And so getting into the financial sector was in an easy move. But I guess there was a level of dissillusion as I was working within it. The purpose of making flows of capital efficient is only partly demonstrated day to day, a lot of it is about charging for investment products which don't always have the investors best interests at heart. And I realised over time that it was probably not a career I could succeed in long term, because I had moral issues with it.
So I went away to business school to do an MBA and during that process, reposition my career. And when I came back, I was fortunate enough to have a conversation with a friend on a similar path, who had left investment banking and was advising charities in the UK on an ad hoc basis. So we decided to join forces and to do that systematically. We set up East Side Consulting, which was a it was called at the time that developed into East Side Primetime as we merged with another organisation that provided a pipeline of talent effectively that we could use to plug into consultancy projects in the social sector. And that's how I made the transition.
And in 2015, I combined my old investments career knowledge with my new social sector knowledge to join CAF Venturesome, which is a social investment fund part of the charities a foundation.
Brendan Le Grange 4:33
Perhaps we should start with the basics, what does social investment mean?
Holger Westphely 4:38
Social Investment means lending money to social purpose organisations with the main aim of generating social impact. Many social investment funds will generate a negative financial return, which is justified because that investors are looking for the social impact. And really, it is often seen as an alternative to grant funding, where you have minus 100% financial return or the money is gone with, of course, you achieve a very high social impact. Social Investment is more of a mix, you give up some of the capital in order to enable things that otherwise might not have happened, possibly to fund the growth of a new trading part of a charity.
Brendan Le Grange 5:26
Yeah, it makes a lot of sense as soon as you think about it for a minute, the market expertise coming in with a social optimization rather than profit optimization. I think everyone listening will have experienced the scenario where you're talking to a group of friends about 'let's go do something together'. And everybody says, 'you do it first, and we'll follow'. Nobody wants to take that first step until they can see some progress, some traction. So I can imagine that a venture capital sort of approach gives somebody a chance to actually start a project, to show their community the good work it's doing, what it looks like, give them a chance to hold it in their hand and see what's happening... and then the money can come in and it can become self-sustaining.
Let's stay paused for a moment before we get into the detail and talk about the Charities Aid Foundation and CAF Venturesome, what drives these organisations and how do you operate on a day to day basis?
Holger Westphely 6:22
The Charities Aid Foundation is an organisation whose purpose is to facilitate giving, on a global scale. It was founded in the UK over 95 years ago and has changed a lot over the years, but it still works with philanthropists, with corporate foundations, and philanthropic bodies to facilitate the flow of capital to the best causes. It also helps navigate the tax system, as well as the sort of financial regulations that may be attached to any financial transactions. We now also offer banking services to charities in the UK. That is a different part from the social investment part, which is very much about achieving a social impact.
I guess I've already moved into Venturesome. So Venturesome is the social investment part of the Charities Aid Foundation and we have access to a lot of philanthropists and a lot of philanthropic institutions who like the idea of exploring different ways of doing social impact. And our funds are a great opportunity to put their money to good work without giving it away completely in one go.
Brendan Le Grange 7:42
When people look at your website, they're going to see the line "we provide repayable finance to help social enterprises" and for most of us, the first time we read that line, it's going to stick a little bit and people might be thinking why "repayable"? Why are you lending money to these charities, isn't it nicer to give a donation that doesn't have any strings attached?
Holger Westphely 8:05
Yeah, so lending has a few advantages over grant giving in certain situations. What we're trying to do is to help organisations become better at doing what they do, becoming more efficient, so that either they can do things they weren't able to do before, or they can do them more efficiently - because they've been able to build some infrastructure, or expand into a new area, or possibly set up some trading activity which generates income, if that's what they're looking to achieve.
We try and fill a gap. It's very difficult to raise grant funding for anything that isn't directly related to a charity programme. Anything that has the word 'admin' in it is the anathema to many philanthropists. And that's where we come in, because we believe that a well run organisation needs opex, it needs capex. It may need to build infrastructure, which it can then leverage to deliver impact and its programmes more efficiently and more effectively.
So we take the opposite approach. What's associated with that, is careful financial planning, careful strategic planning, which should make a project like this that we invest in, pay for itself. So that's one of the reasons that this approach makes sense and fills a gap.
Secondly, from a philanthropist point of view, it can help the capital go further because rather than giving £10,000 pounds away once, if they lend £5,000 to two organisations and receive the money back and lend it again, maybe lose it over four or five loans - they've been able to help five organisations. If you scale that up, we typically held our funders over five years to use their money one and a half times. So they will have invested, it would have come back, we would have invested it again. And after five years, they're getting the money back what's left, we obviously don't manage to recover 100% of it.
And then thirdly is the rigorous financial management and planning required in order to obtain a loan. And in order to service is often a skill that organisations have to build up and discipline that they have to get used to developing a project budget for a grant is easier than developing a cash flow for a three year loan. And that's something we're looking to incentivize our borrowers into, to give them the opportunity to enhance their financial planning and financial management skills.
Brendan Le Grange 10:52
Yeah, that's another good example of why it's valuable to apply these entrepreneurial type approaches over the other side of the fence as well, because when you're starting your own business, people also say that writing out all the financial figures, that planning, the numbers might end up being completely different - nobody can predict five years in the future - but that that act of sitting down with a pen and paper and working out what comes when 'oh, I forgot about this, then this might happen', it's that thinking that's so valuable. And in the end, whether you use the numbers or not, is almost secondary.
You're listening to How to Lend Money to Strangers. If you're enjoying it, please hit the little plus button to subscribe and share it with your connections on LinkedIn. Now, let's get back to the show.
We're a lending podcast here, so we can probably get a little bit further into the weeds than most. But when you talk about a loan to a social enterprise, to a charity, what does that look like? What sort of conditions are attached? How are you screening borrowers? How do you make that lending decision? Does it look familiar to a banker?
Holger Westphely 11:55
My feeling is it will familiar to a banker: it is a very labour intensive process, we will kick the tyres even for relatively small loans, to get the comfort that what the borrower is planning to do makes sense and that they have the skills and resources to achieve that. And at the same time, that we understand the social motive behind it, and that there is an element of value-for-money.
We do expect the social impacts to justify that investment and terms of value, the amounts that we lend range from £10,000 pounds to £400,000 - those are quite different types of loans. We work with very early stage social enterprises or social entrepreneurs in some cases who are just getting going and are looking for a very small startup loan, this will usually be interest free, and may even come with a bit of additional grant funding and business support. So that's obviously a very end at the other extreme, the £400,000, it will typically be a larger organisation with a stronger balance sheet looking to grow. And our interest rates will be between 5% and 6.5%, depending on on risk, and also social impact. The term is usually three to five years, but we can stretch as far as 10 years as well for areas where more patience is required.
Brendan Le Grange 13:33
I mean, I'm sure an environment that would sound familiar to somebody in the SME lending space where you've got to run that similar gambit from the startup with the owner working out of their spare room, right up until pretty large businesses actually, maybe even getting more towards the business corporate banking side.
When you talk about the repaying of the loan, where would that typically come from - are these usually organisations that would use the money to get started and then look to get other grant money government money as they go? or do they look to raise donations in the future? or are they creating businesses that bring in some revenue just not enough to stand on your own feet?
Holger Westphely 14:13
All of the above, I think you've named every single source.
And we have used every one of those sources to get repaid. If there's a business model that lends itself for example, charities deliver government government contracts, it is just a case of financing that contract delivery ahead of time. If the payment comes at the end, it could be through a mix.
So I'll give you an example of something that was entirely refunded through donation. So there's a school in Port Elizabeth (Gqeberha) in South Africa called Ubuntu Pathways. Ubuntu has a campus which is a community institution. It includes various support services for children, early child development wing, Community Centre with a rooftop garden, on-site clinic, pharmacy and job skills training centre. Now in 2019, they approached us to take on a social investment loan of £100,000 in order to help them build a state of the art primary school immediately, not having to have several gala dinners or fundraising events, which could take them several years to get the money together. And they've now repaid the whole amount.
And in part because of the loan, they were able to provide other services to the community when there were really, really needed during the pandemic.
So just a reminder, they took on the money in 2019. And were able to build a school over the next couple of years, but in addition, had infrastructure to administer 20,000 COVID vaccines and help people with with monthly food packages during the height of the crisis. And they were able to place young people in jobs during record unemployment times and had a really life saving impacts on those communities as a result. So there was, fortunately, a massive benefit in pulling this investment forward.
Brendan Le Grange 16:21
Yeah, that's a great example of it. Because something like a building project anyway, takes a long time to be delivered. And if you first got to wait three years to raise the money, then engage the builders, and then it's going to take another year or two to build out the structure as well. It really does extend it. Whereas if you can raise the money, you can get the builders involved, they can start you've still got that period when they're building that you can raise money and get everything ready. But it's drastically shortens that and makes it I think far more possible that the people that were engaged at the start, don't lose motivation and disappear.
The key differences where your normal bank is going to say 'where's the big profit coming from, where's the big revenue coming from in the future, that gives me that comfort that this loan will be repaid for you?' the social impact comes in and plays such a big role, in local community-driven staff to really projects that are trying to change the world for the better.
What - I don't know if you've got off the top of your head - but any projects that that really warm your heart when you think about what you've been able to release with with the funds you've lent?
Holger Westphely 17:23
One of my favourite, and this is a little bit longer ago but really topical today, was an organisation called the Peaceful Change Initiative, an organisation that looks to lessen the impact of war in war zones. And the idea is that both while the conflicts going on, and after the conflict is finished, the communities that might have been on opposing sides are able to work together again and build constructive relationships. That organisation worked in Libya, Syria and the Ukraine. So this was after the first invasion of Crimea, really important work that has a massive impact on the on the people who are the most desperate.
Brendan Le Grange 18:10
And I guess that complicates matters when you're looking at the loans, and you've got to try and weigh-up social impact versus financial stability, or what do you think might happen from an organisational point of view, doing that loan screening upfront - how do you try and weigh those two up? Do you have different investors or different funds that lean one way or another or is it down to you to try and find a balance where you've got an organisation you might really believe in their call, but it's very risky from a financial point of view. And you're comparing that to somebody who's got a fairly safe project that's going to make their community better, but in a relatively small way.
Holger Westphely 18:51
We try to weigh up risk with impact. So it's not a risk-return equation but risk-versus-impact. So basically, we're prepared to take much greater risk on projects that we feel will generate a higher impact. Now, it's of course not only the financial return that is at risk, but also the social return because if we feel that the organisation is not likely to succeed, then there's no point in making the investment, even if we're happy to lose the money. We have a framework which gives us a bit of a sense as to the social impact and organisation generates and specifically that our investment in that organisation generate and we have a risk matrix which will look more common to most investors. Those are the kinds of thought processes. We do have investors who are happy to take greater financial risks so we can make sure that we use the right type of capital.
Brendan Le Grange 19:54
If people listening want to be part of that investor community, how do you raise the money you use for these loans for these broader initiatives?
Holger Westphely 20:04
Yeah, so we approach high net worth individuals - our minimum investment in our funds, returnable investment, is £20,000 (we can take donations at lower levels, because they always need a lot less, less management). And a donation would sit in our fund ad-infinitum and be deployed until it is lost, whereas an investment in our fund is returnable - usually after six years, we also approach corporate foundations and other philanthropic institutions to raise our capital. And it's of course, always important to manage expectations, this is likely to be a loss making investment, we tend to expect losing between 8% and 15%, give or take.
First of all, the return is likely to be less than the capital investment. And the other thing is as this is philanthropic capital, even when it comes back, it can only go to charitable causes. So any money we repay to our investors they can spend on charitable projects of their choice did not take back and buy a car from it.
Brendan Le Grange 21:18
Okay. And you mentioned not being paid back at times when a borrower is unable to repay the loans. What is your process there to work with them, obviously, sort of within the lending world, we'd want to jump on to collections call and then try and get our money back - how do you approach situations where you've got a borrower who for one reason or another is going to be missing a loan repayment?
Holger Westphely 21:44
So we will do one or three things. The first one is the softest, would be just to wite off our loan and say "you're better off without having to repay us, we believe in the social impact you're having, we know you've tried hard to repay us things didn't work out the way that we had all planned". And this happens.
The second thing we can do is - and we do most commonly - is look to restructure the loan, maybe loan repayment holidays, or come up with a different payment mechanism. That gives the organisation a chance to maybe maybe transition to a slightly different business model, and so on. And we will always look at social impacts as part of that equation on how generous where we're comfortable with being.
And the third thing we do is demand our money back, legally, which could mean the organisation goes into administration, could mean that you have to sell a building or whatever. And we keep that for what we call 'badly behaved borrowers' who don't engage with us, they don't do what they say they're going to do. Maybe we're not comfortable that the social impact is really all that they told us it would be in those cases, we will try and recover what we can.
Brendan Le Grange 23:07
Yeah, and I think what's quite interesting with those sort of high-level numbers you shared is, I think you're showing that you're well intentioned good entrepreneur is going to try and pay you back. So even when you're focusing on social impact, you're going in with your eyes open that many of these are likely to be loss-making, or unlikely to be profit making at least, the losses aren't all that high. And maybe there's a lesson in there for traditional lenders who want to help out entrepreneurs to maybe take a little bit more of a perceived risk, maybe trust a customers a bit more. And the losses aren't 100% or the 50% loss rate, they might fear. Now, of course, the sort of person who's a social entrepreneur is arguably a nicer person to start off with, but yeah, if anyone listening would like to learn more about CAF Ventursome or indeed the Charities Aid Foundation and the projects you're doing, or to get involved in some of the upcoming work you're doing, where is the best place for them to head over to learn more information or to start a conversation?
Holger Westphely 24:09
Yeah, so Venturesome we have our own URL is www.venturesome.org so that's all the social investment part, to look at the project. If you're looking to borrow money, or if you're looking to get involved in social investment, that's the best destination. And CAF, the Charities Aid Foundation more general is our parent charity, we're part of that group, and the URL is www.cafonline.org
Brendan Le Grange 24:42
Great, well Holger, it's been a pleasure having you on and yeah, a very different take on lending that has hopefully opened the eyes of some of the listeners to ways that we can leverage the skills we have as lenders to produce good outcomes, you know, instead of just doing a normal team day out cleaning up a local Children's Home or helping to pick up litter on the side of the road. There's ways they're lending organisations and perhaps get more actively involved and use their skills. They're using day to day to help fund growth in the charity space in the social impact space. So it's been eye opening for me and a lot of fun as well. So thank you for joining me.
Holger Westphely 25:19
Thank you very much for the opportunity.
Brendan Le Grange 25:21
And thank you all for listening. If you enjoyed that, please do rate and review on your preferred podcast platform and share widely including on LinkedIn. And while you're there, send me a connection request. The show is written and recorded by myself Brendan Le Grange in Brighton, England and edited with assistance by Kane Hunter. Show music is by Iam_Wake and you can find full written transcripts, now in several languages, show notes and more content at www.howtolendmoneytostrangers.show
And I'll see you again next Thursday.