Why we must rethink the way we view charities

Blog/Tim Jones, Chief Executive, Allia

Many who follow the development of the charity sector will be aware of the activist and fundraiser Dan Pallotta. His book Uncharitable and later his TED talk sparked debate and no little controversy by arguing that charities should behave more like private sector companies, paying higher salaries to attract the best staff and spending more on advertising in order to reach more people.

His argument is that if it’s ok for entertainment, tobacco and other companies to operate in this way, then it should also be appropriate for charities to work in the same way too. After all, they are trying to solve some of the world’s most challenging social problems, so they should have the best possible resources available to them to do that.

However, one of his lesser-known arguments is historical. Pallotta says that our present view of the sector is skewed by the fact that 17th century Puritans played a major role in defining the concept of charity. This, he says, led to charities being imbued with a counter-productive morality of self-denial and frugality that remains to this day.

While the merits of Pallotta’s views are open to debate, at the very least his historical analysis highlights the fact that we seem to have quite a fixed idea of what a charity is. Indeed, it is widely expected that charities should rely on the goodwill of others in order to achieve their objectives. As a result, when we think of charity, our first thought tends to be of those that rely on fundraising and philanthropy to generate income.

Yet the reality is often quite different. Many organisations with charitable status are enterprises with assets, which buy and sell goods and services in order to fund their activities. There are any number of universities, care-home providers, museums, housing associations, hospices and academy schools which are charitable endeavours and yet, essentially, businesses with assets and liabilities, income and expenditures like any other enterprise.

So why does this matter? Just as in the private sector, many of these organisations need capital to set up new buildings, projects, plant and equipment. While it might take a charity several years to raise £10m for a building through donations, a loan can allow it to move in much more quickly. With the new building up and running, the charity can use it to deliver its service and generate the income to deliver it.

Banks are the obvious place for charities to seek loan finance, and many do take this route, but the current financial climate is not healthy for lending beyond the short term. Those charities that do obtain finance will find they pay a relatively high interest rate, as banks have to fund a whole range of regulatory compliance and are under pressure from the government to build up their balance sheets.

At Allia, we enable members of the public to invest in charitable organisations via retail charity bonds. These products can offer charities competitive value for money than bank loans, and have to date been over-subscribed with investors keen to lend.

However, a lack of understanding about how and why charities could and should use retail bonds and other forms of loan finance is restricting their availability – not just from us but from other providers too. I recently heard of one of the UK’s leading investment management firms saying they couldn’t recommend our stock exchange listed bonds as they didn’t think charities should borrow money!

We need to work much harder to explain to investors, the media and charities themselves why asset finance can be a valuable financial tool.

It is essential that we get the message out that retail investment in charitable endeavour has the potential to greatly enhance the effectiveness of the sector. Vast sums of capital are – and will continue to need to be – invested in capital assets for civil society. Whatever the aspect of charitable benefit, whether for hospices or care homes, education or orphanages, museums or the arts, social housing or healthcare, it has to be good for both the sector itself and for the democratisation of society in general, for there to be ready access to low cost, tax-efficient, liquid, price visible and exceptionally socially useful  investments!

Allia will do everything it can to keep growing this market so that more charities can generate the funds they need to make a real and lasting difference to the communities they serve.