None of the social economy businesses that we have been involved in developing would have started without grant funding of some kind. In that respect grants have not only been good for the business, but essential.

However, that said, our experience is also that grants can pose a number of challenges and difficulties for social economy businesses, which if not faced effectively, can also cause serious damage.

Our experience with funders over the years has generally been very positive. However, this has not always been the case, especially as funding mechanisms initially established to address social need have struggled to take account of the different requirements for funding businesses, albeit within the social economy.

This article is an attempt to share our experiences in a way which may be practically helpful to others.

Challenges

Among the many challenges faced by those social economy businesses that receive grant aid, challenges which we have experienced ourselves or have been recounted to us in writing this book, the following stand out as the most significant.

The business plan ends up focusing on grant criteria rather than on the business. Funders often have very specific requirements relating to how their funding can be used, which can relate to the type of business supported, timescale within which funding can be used or the particular aspects of the business which can be funded (eg capital items).

This is perfectly understandable, but the danger is that in seeking to access such funding, the business plan can, even subconsciously, be adjusted to take account of what the funder expects. In many cases this may not matter, but if for example a business plan shortened the time projected to reach profitability to stay within a funder’s limits, the entire business could collapse resulting in the loss of significant money, jobs, and so forth.

Of course a business will need to be presented in the best possible light to any potential funder (or indeed investor), but it is critical that the plan really is achievable and that those promoting and managing the business really believe in it, not just the funder.

There is a significant cost in complying with funder’s requirements. Do not underestimate this as it can be much more onerous than for example the requirements of a lending institution. Such compliance will not add any value to the business and therefore in the midst of trying to make a business profitable it can be easily ignored.

However, ignoring funding compliance is a very bad idea, as funders have the ultimate measure to ensure you do comply – withholding funding, and if this happens at ‘the wrong time’, you will put the whole business at risk. With hindsight, we would now recommend putting the significant time cost of compliance into the business plan from the start.

Business decisions may require the permission of your funder. Even businesses with robust business plans will need to react to a changing environment, and indeed sometimes react very quickly. Speed of decision making may already be adversely affected by internal processes required by funders but if the decision entails a ‘change of direction’ from that indicated in the business plan that accompanied a grant application, the funder may also need to be consulted.

Such consultation may not happen quickly as most funders have their own sometimes slow-moving decision-making processes and by the time the decision is finally made the danger may have materialised or the opportunity passed.

The focus on profit can be softened. Normally in any business there needs to be a very clear focus on profit – managers are continually looking at ways to cut costs, work more effectively, increase profit, and so on. However, you may become more profitable, more quickly, than you (and therefore your funders) planned. This might make you and your bank manager very happy but in some circumstances your funders may be worried and even try to recoup some of the grant. This may be understandable from their perspective but it will certainly do nothing to sharpen the business focus on profit!

The ‘goal posts’ may change after the grant has been accepted. Of course this shouldn’t happen, but sometimes the organisation the funder is accountable to may ‘clarify’ matters after grants have been made and apply new conditions. Such changes may be legally challengeable but for most new businesses a legal battle may be enough to sink the business before it is established. Anyway, most funders appear to have virtually unlimited legal support when required, so any challenge could be very expensive.

If things go wrong, there are no ‘equals’. If a relationship with a funder does break down you will probably quickly find out where the power lies in the relationship! Usually the letter of offer, which you probably did not read all that carefully, gives significant powers of interpretation to the funder. Add to this the funder’s recourse to legal advice and the reality that they probably still hold significant unpaid grant, and you will soon see that falling out with a funder is not a good idea for your business.

Managing your relationship with your funder

While it is hoped that funders who are supporting the social economy will continue to refine their processes to take account of the differing needs of social economy businesses, there is also a responsibility for us to manage our relationships with these agencies without which we could not operate.

Build a positive relationship with your funder. This is perhaps the most important lesson we can learn, as within a positive relationship many of the challenges raised above can be faced productively. Such a relationship is often built on the interpersonal communication between the key personnel involved, but it will also help if we can:

Recognise your funder’s needs. Funders are also working to plans and are accountable to others. Understanding their needs in this respect is therefore important so that we do not simply interpret every action in terms of how it affects us.

Give your funder confidence in your competence and integrity. Funders want to be sure that their money is in safe hands so give them confidence that with you it is.

Give your funder positive publicity. If they share in your success, they will be more committed to helping you succeed

And even with a good relationship…

Always read the small print. Do thoroughly read your letter of offer and associated conditions, and don’t sign it if you think it will cause you serious problems in the future, although this can be difficult as the offer terms may not be negotiable. In the event of any difficulty you can be sure that the ‘small print’ will be enforced.

Keep a record of funders’ requirements. It may even be useful to keep a formal register of requirements so that you are managing their compliance; that way surprises should not happen.

Make allowance in plan for compliance costs. As suggested above, build compliance into your business plan, especially in terms of the staff time involved.

Two questions

Before applying for a grant for your grant in the first place, ask yourself these two questions:

Would we invest our own money in this business? Assuming you had any and could invest it, if the answer is no, then don’t bother applying for the grant. If you do, you deserve the inevitable heartache it will bring!

Do you need a grant at all? Don’t assume that a grant is required. Look first and see if your business idea and plan can work without one. If it can, the ‘baggage’ that goes with a potential grant may do more harm than good to your business.