Education

When Buy Social Canada and Tapestry Community Capital first started collaborating, our conversations noted how siloed conversations around community finance and social procurement could be. In any given calendar year, we both attend quite a few conferences, but we rarely find conversations, panels, and plenaries that delve into how we bring community finance and social procurement together. 

For us, it’s a simple premise: businesses need both access to capital and ongoing customer spending to succeed in the market. This is especially true for social enterprises, which deliver blended value through social and financial outcomes, but may face additional barriers that traditional for-profit businesses do not. One without the other may mean that social enterprises are unable to develop and scale as they desire. It’s clear to us that community finance and social procurement play complementary roles in creating and strengthening the social value marketplace. We’d like to kickstart this conversation with this blog and generate momentum towards better connecting our shared values and work.   

For readers who don’t know, let’s first define some key terms:

• The social value marketplace (SVM) — a term coined by Buy Social Canada’s founder, David LePage — is “a marketplace where we trade goods and services for the purpose of creating healthy communities.” This marketplace consists of three critical components: social procurement, social value finance, and social enterprise. The SVM is analogous to the social economy.
• Social value finance — or social finance for short — is an umbrella term. It’s defined as (repayable) financing that generates both financial and social, cultural, and/or environmental “returns” (outputs or outcomes). Community finance is a type of social finance, defined by its place-based nature and community engagement/participation.
• Community finance entails both philosophies about and tools (i.e. debt, equity, outcomes financing) that enable capital to flow into, and circulate within, communities. This can be via community bonds, micro-financing, promissory notes, friends-and-family loans, member shares, credit unions’ lending, community-based loan funds or community-driven outcomes contracts.
• Social procurement uses purchasing to achieve institutional, governmental, or individual goals, shaping inclusive and healthy communities. This involves designing policies, adding social value criteria to bids, and seeking out social value suppliers like social enterprises. By focusing on ‘best value for money,’ rather than just the lowest price, makes procurement a tool for building healthy communities.
• Social enterprises sell goods or services with a social, cultural, or environmental purpose, reinvesting most profits into their mission. They operate in a diverse range of sectors including groceries, catering, waste disposal, healthcare, family services, arts and culture, employment assistance, and construction. They compete with traditional businesses but invest their earnings into healthy and vibrant communities. The future of business is social enterprise, built on justice, equity, and inclusion for all stakeholders.

How community finance and social procurement work together to strengthen the social value marketplace

Community finance can ensure social enterprises acquire the capital needed to grow or expand, which can also help them win new procurement contracts. On the flip side, every purchase has a social, economic, cultural, and environmental impact. In order to make community finance work, social enterprises often need procurement in order to not only pay back their financing, but also to help them sustain and grow. 

Mike Brigham at SolarShare’s Waterview Facility. Source: Green Energy Futures.

For example, SolarShare Cooperative — Canada’s largest solar energy cooperative — leveraged community bonds to great effect (raising $80M and paying out almost $12M in interest to 2000 + community investors). They were able to leverage community bonds not only because they had a solid business model, but because at that time, Ontario’s government also had a Feed-in Tariff program which guaranteed SolarShare revenues and ensured that they not only could pay back their investors but also scale their projects — and thus scale their impact. At Tapestry, we’re keen to explore how we can stack community bonds and outcomes-based purchasing to create more equitable financing terms for social enterprises.

Social procurement complements finance because it often provides more stability for social enterprises in the long term. If a social enterprise can secure repeat clients or ongoing contracts with purchasers, this can build sustainable revenue models that enable social enterprises to grow or maintain operations.

Certified Social Enterprise: Purpose Construction.

A clear example of this comes from Purpose Construction, a Winnipeg-based Certified Social Enterprise. Their base of operations is a major social procurement agreement with Manitoba Housing, but they also have relied on grants and other government funding. Purpose Construction Executive Director Kalen Taylor says the cycles of government funding “leave us vulnerable, and we’re really trying not to lay folks off because then they lose housing or custody of their children.” Learn more in Buy Social Canada’s Sell with Impact report. 

Oftentimes, to help new social enterprises scale, it is necessary to build the financial tools, marketplaces, and procurement that help level the playing field for organizations.

In order to support social enterprise and grow the social value marketplace, we need the community finance and social procurement movements to continue to grow. There is more work to be done by everyone in this sector to increase social enterprise access to funding and procurement opportunities — through policy, advocacy, and action. 

Connect with us to continue learning and get involved:

• Join Buy Social Canada and Tapestry Community Capital for two upcoming webinars:
  • On July 10, Buy Social Canada will host Tapestry Community Capital for an introduction to community bonds.
  • On July 23, Tapestry Community Capital will host Buy Social Canada to share an introduction to social procurement.
• To discover more about Tapestry’s policy advocacy to strengthen community financing tools, download and read Moving Community Bonds Forward, a research report that explores how we can equitably scale community bonds.
• Read David LePage’s book Marketplace Revolution to learn more about the social value marketplace and how social finance, social procurement and social enterprise are the tools we need to create community capital.

This blog is co-written by Tapestry Community Capital and Buy Social Canada to help amplify each other’s work to our respective networks, and reinforce our mutual support.

About Tapestry Community Capital:
Tapestry Community Capital is a non-profit cooperative that aims to democratize access to capital. Tapestry guides other non-profits, charities and cooperatives to raise community bonds. Tapestry is also a Buy Social Canada Community Champion that supports a shared mission to grow the social value marketplace and social economy within their networks and communities.

About Buy Social Canada:
Buy Social Canada is a social enterprise that believes procurement is more than an economic transaction, it contributes to community social and economic goals. Buy Social Canada works with public and private sector purchasers to implement social procurement, and offers the only Canada-wide third-party social enterprise certification. 

Typically, a community bond campaign takes about one year from start to finish. While every project is different, and may vary slightly depending on the total sum being raised and unique project milestones, we find that the vast majority of organizations are able to achieve their funding goal within this timeframe.

In this article, we will walk you through our community bond process so that you can understand how your funding timelines can fit with your project needs.

Getting Started

Each community bond campaign begins with an introductory workshop as the first step. This 3-hour session will be a chance to bring your entire organization together (Volunteers, Staff, Board Members, Advisors, etc.) to learn more about community bonds and how they could potentially be used to fund your project. After the workshop, you’ll receive a readiness assessment from Tapestry with a recommendation on whether community bonds will be a good fit for your project and organization.

If your assessment suggests that community bonds are a promising financing route, you will move into the Planning & Feasibility phase.

Planning & Feasibility

Clients come to us at all different stages. It is our job to get you to the point of being investment ready. In order to do this, we will model your finances to get a picture of how much debt your organization can comfortably carry.

Next, we will map your community stakeholders to understand their needs and appetite for investment. Together, these two critical steps will take approximately 2 months.

If it is clear after Planning & Feasibility that 1) your organization is in a financial position to carry debt and repay investors, and 2) there is a sizable community to support your project, you will move into the Structuring phase.

Structuring

During the 3 months in Structuring, we will be helping you to set your bond terms. This will be done through a combination of financial modelling and community consultations to test the bond terms.

We will also be preparing all the necessary documents to bring your investment offering to the public. These will include a:

• 5-10 year business plan
• Offering statement
• Term sheet
• Trust agreement

Your Tapestry Campaign Manager will work with you to create your marketing and communications strategy, and set you up on our sales platform so that investors can easily invest online. We will train you to use these tools, and to communicate effectively with potential investors.

By the end of the structuring phase, you will have:

• Your investor package ready to go
• A campaign website that links to your organization’s homepage
• A marketing and communications plan that will include a detailed budget and timeline for key messages through social media, e-newsletters, investor information sessions and press
• A sales process set-up on our customer relationship management (CRM) system and on Tapestry’s investor management platform, Atticus

Raise

At this point, you will be ready to go live and bring your campaign to the public! Once your campaign is launched, it will take 6 months to raise your target investment. Though this timeframe can vary slightly, we find that a period of 6 months gives your organization enough time to tell your story and demonstrate your impact, and gives investors ample time to do their research and make an investment decision.

We generally don’t recommend extending beyond the 6-month timeframe as there needs to be a sense of urgency in order to engage investors.

Your Tapestry Campaign Manager will meet with you regularly throughout your raise and make sure your campaign is on track. As bonds are being purchased, our Investment Management Team will work in the background to onboard investors and process their transactions.

Management

Once you have reached your target investment, Tapestry will continue to support you with professional investor management services for the duration of your bonds.

Our Investment Management Team will look after interest disbursements, issue tax forms and provide customer service to investors as needed. At year end, we will also support you with financial reporting on your bonds.

An accelerated timeline is sometimes possible

We are often approached by organizations that are on a tight timeline and interested in pursuing an accelerated plan. In some cases, this may be possible but will depend on the readiness of your organization.

In certain cases, organizations may have already taken the time to build detailed financial models on their own. In such a situation, we would work together to assess whether it is possible to by-pass the Planning & Feasibility phase.

If your project will require tighter timelines, it will be important to share this with the Tapestry team early on so that we can adjust your schedule accordingly.

Don’t raise before you can spend

Another important question is when to raise your funds. We always advise organizations not to begin raising funds until they have a defined use for the capital, and there is a planned transaction date within sight.

Of course, if you are searching to purchase a property, finding the right property may take time and you will need the funds in hand to do so. However, once your raise is complete, we recommend deploying the funds as soon as possible as you will be beginning to accrue interest.

Under certain circumstances, it may make sense to stage your raise to match project milestones. For example, if you are constructing a building rather than buying one, you may wish to issue multiple offering statements in order to secure the funds only when you need them.

Tapestry will always work with your team to understand the important milestones of your project, and do our best to match the timing of your funding.

Where to start?

Are you interested in raising community bonds for a project? The first step is our Introductory Community Bond Workshop. Learn more about it here, and get in touch with a member of our team at info@tapestrycapital.ca.

One of the most common questions we receive from groups interested in raising community investment is “What is the right amount to be raising in bonds and how will this financing fit with our other sources of funding?”

The long and short of it is, there is no correct financing mix. Every organization that we work with is unique, and therefore, there is no magic one size fits all answer to this question.

However, in this blog we will attempt to give you some high-level ideas and thresholds for project financing. Once we begin to work with your organization and better understand your project and financial situation, we will be able to provide your team with some guidance on how much your organization can raise in community bonds.

We always recommend that this work is done in close cooperation with your finance/accounting team and Board Members, as they will have important insight on the risk tolerance of your organization and its capacity to carry debt.

Types of financing available to nonprofits, charities and co-operatives

When we speak of an organization’s project financing, we will often refer to their capital stack. In simple terms, the capital stack represents the underlying financial structure of an asset or real estate deal. Often, the capital stack is presented as a graphic that shows the different types of capital in a deal stacked above each other, like a cake with many layers.

Types of financing that may appear in a capital stack:

In the case of co-operatives, it’s also possible to issue preferred equity in the form of preferred shares. This cannot be done for charities or non-profits because they cannot be owned.

Finding the right mix for your organization will mean balancing your appetite for risk and your cash flow situation. Ultimately, the goal of your organization should be to align your sources of financing with your project timelines and key cash output milestones, and balance this with finding the lowest cost of capital through a combination of the tools above.

Percentage of total financing

There is no correct percentage of bonds within an organization’s capital stack. It could be as little 5% for a large project or as much as 100%. In the past, most of our clients have raised 10-40% of their total financing in community bonds.

For certain organizations, it may make sense for the bond total to be a larger piece of the puzzle. This is common when an organization needs to access a large sum of capital quickly, and don’t have the time to fundraise, or when traditional lenders are only willing to finance a smaller piece of the project.

“Bonds are such a great tool for community organizations to use when considering a capital raise,” says Mary Warner, Co-Executive Director at Tapestry. “Community bonds allow the organization to set the terms of the financing in a way that works best for them and allows them to reach out to their community in a new way, offering a chance for their supporters to invest in the future of their project, and to directly benefit from a financial return on that investment”.

Total dollar figure

“There are a lot of factors that go into determining how much an organization wants to raise but we have seen many partners accomplish their goals in raising between half a million and five million in their first raise,” says Mary.

Setting an initial goal within this range can help set your organization up for success. This is simply because the concept of bonds will be new to your community, there will be no existing marketing and messaging around your project, and you won’t have had the opportunity to test your community’s appetite for investment yet.

Due to certain fixed costs (ex. Legal, marketing etc) raising less than $500,000 in bonds isn’t generally a cost effective way to raise capital. Typically, the more you raise, the less it will cost per dollar of financing.

Once an organization has successfully completed an initial raise, they will have the opportunity to tap into their existing investor base and issue reinvestment campaigns. They can also build on the message of a successful bond raise and consider raising bonds for different projects in the future.

“We’ve seen this type of sequential bond raise with several partners, including SolarShare and ZooShare,” says Mary. “Building on the success of their initial raises, and foundation of proven ability to raise and manage community investments, has allowed these organizations to expand their projects and further their missions.”

We often see reinvestment campaigns that are much larger than first time raises. This is because, with time, issuers become more comfortable with their investor base, gain a better understanding of their community’s appetite for investment, and have built a solid marketing narrative around the organization, project and offering.

For example, our largest single raise to date has been $16 million, and this was a reinvestment campaign for an organization that has done repeated raises.

If a first-time raise over $5 million dollars is being contemplated, there are many things the organization will have to consider to ensure the raise is successful, including having sufficient staff and marketing support to maintain momentum.

Some organizations may have an easier time with a larger first campaign if they have:

• Experience running a substantial capital fundraising campaign
• A large and engaged pool of donors, members or supporters
• A large project that will gain significant community and/or media attention early on

Deciding which types of financing should be used for different expenditures

Ideally the duration of the liability should match the duration of the asset, to the extent possible. In simple terms, this is why a mortgage would have a 25 year maturity, while a car loan would have a 3-5 year maturity.

In the context of your project, you should be thinking of the underlying asset of your project, and its associated projected cash flow.

Generally, community bonds will work well for funding long-term assets. A line of credit would be better suited to funding a short-term project or addressing a short-term funding need.

Relationship to other funding sources

Typically, if there is a mortgage in place for a project, community bonds will be subordinate to the mortgage. In other words, in the case of a default, the financial institution holding the mortgage will have the first right claim on the asset, followed by the community bond holders.

These details will be negotiated as part of your mortgage deal, and you should inform your financial institution of your intent to raise community bonds. In our experience, traditional financial institutions welcome community bonds as part of the financing mix as they view them as standing in the place of equity, and as an additional capital buffer.

“When considering community bonds as part of your capital stack, if it will be in tandem with a mortgage, it is important to engage the mortgage lender with the idea early on,” says Mary. “We have seen many organizations use both community bonds and a traditional mortgage so it is a possibility but it is important to be clear with the lender or potential lender about your intentions so that you can have firm expectations about how much will be raised and what the timelines for financing are.”

Where do we start?

Figuring out your project financing can be complex, and at Tapestry we understand this very well. We are always happy to speak to your finance/accounting team about how community bonds could fit into your own unique mix.

If your team is interested in pursuing community bonds as a source of financing, we encourage you to reach out to our team and register for our Intro to Community Bonds Workshop.

Finding the right rate of return for your community bonds will be critical to both your campaign success, and ultimately, your project success. Of course, it will be to your benefit to keep your cost of capital as low as possible. But at the same time, you will need to position an attractive investment to engage your community and ensure that you raise the capital you need. 

Finding this balance is our specialty. Through a combination of financial modelling and community consultations, we help the organizations that we support to design bond terms that work for their balance sheet and their community. 

Today we sat down with Mary Warner, the Co-Executive Director of Tapestry, to give you more insight into the process of crafting community bond terms. Below, she answers a few questions that recently came up during one of our Community Bond Workshops that we offer to non-profits, charities and co-operatives.

What is the typical rate of return offered on a community bond? 

“Bond rates that we’ve seen typically range at the low end from 3%, to about 7% at the high end.

We’ve seen bond interest decrease slightly with the pandemic and current economic situation, but issuers do want to provide their investors with a decent rate of return for the risk they are taking on. So, we haven’t seen rates drop as significantly as commercial interest rates. Current rates for community bonds are averaging at about 3.5-5%.

Typically, the longer the bond term, the higher the interest rate. Another important note, is that when we are referring to interest here, we are speaking of simple interest – where the interest is paid out and does not become part of the principal. Compounding interest (where interest does become part of the principal) is possible in community bonds, but more complex and expensive to issuers. So, for the most part, we see simple interest with community bonds.”

How can we figure out how much we can afford to pay out?

“This is when our financial modelling comes in. The first step is putting together a business model with projections of the next 5-10 years, incorporating your new project.

Then we piece in different options for community bond rates and terms, based on your needs and early assessments of your community. It’s sort of a trial and error process of testing the community bond interest expense and principal repayment. Ultimately, we want to land on a few options that income and cash flow statements can bear.”

Can greater impact mean lower returns?

“That’s a really good question. We have seen in the past that investors may be willing to take a lower return if they feel a strong connection to the project and are passionate about the impact. 

It’s really about finding a balance between the social and environmental return, and the financial return. If the impact is significant and important to the issuer’s community of supporters, you may find that investors are willing to take a slightly lower rate of return. 

If you are a charity, you might also be interested in looking at the ‘giving bond’ model. This is  where investors invest an amount of principal, but instead of receiving interest back as a payment to them every year, the interest is donated back to the charity. The investor does take on the income tax implications of having investment income but they get the benefit of a charitable receipt for the amount of money they donate.

So essentially, it’s equivalent to baking in an annual donation to the charity, and on the flip side, offering the charity an interest free loan. At the end, investors get their full principal investment back.”

We are afraid that we might need a few years to get up and running and generate a profit. Will that be a problem for us in issuing bonds?

“Not necessarily. When we are doing financial models, we want to see that there is the potential to pay back bonds at the end of their term. If your project will take a few years to generate the income necessary, we might want to look at a longer period bond. On the short end, there are 3 year bonds, on the longer side you could be looking at 7-15 years. 

There are also different ways of paying out interest. You might choose to withhold interest payout until year four for example, or to simply pay out all the interest upon maturity. Those are just some of the options we have to manage your cash flow. 

It’s completely normal that in the first year or two you might not generate consistent income until you are steadily up and running. What we want to see in the financial model is that in the longer term, these bonds can be repaid.” 

We would like to have a 10 year bond, but we are worried that investors won’t want to keep their money tied up that long. Any suggestions?

What we’ve seen in the past with other issuers, is that it’s good to offer investors a mix of bond options. So, if we are offering a longer term bond, we might also want to offer a shorter term option. Some investors are able and willing to invest in a 10 year + bond and others will look for a shorter investment.

Having at least two series of bonds with different terms and rates can help with marketing efforts and give options to investors with different motivations. The added benefit of having multiple options is that it can allow you to stagger your principal repayments.

When it comes to a shorter term bond, there is also the option to refinance bonds at maturity. Often, our issuers who issue shorter bonds will choose to issue a new offering statement once their bonds have matured and ask investors to reinvest their funds. We see issuers having very high reinvestment rates. For example, our client SolarShare has found that when bonds reach maturity, about 60-70% of investors choose to reinvest their funds.”

Is there a possibility to repay the principal before the end of the bond term?

“Yes, typically in the offering statement there is a clause that will allow organizations to pay out the principal early. But there is a lot to consider in making this decision. It can sometimes be to the benefit of organization, allowing them to save on interest costs. But it’s also important to consider the relationship you have with your investors. 

It may sour the relationship if investors expected this investment for a period of time and they no longer receive interest payments because you decided to repay the principal early. So yes, there is the possibility but the consideration should not so much be ‘can we?’ but ‘should we?’.

In the case of investor need, the offering statement or the Board can set out the terms of how an “early redemption” takes place.  In some cases it may not be possible, in others you might consider allowing an early redemption if the investor provides a letter stating financial hardship and requesting a redemption prior to maturity.”

We work in a low income neighbourhood and it is important to us that we include our community in this campaign. How can we do that?

“Economic inclusion is a really important topic, and for most of our issuers it’s very important that bonds are accessible to a wide range of their community. We have seen bond minimums set as low as $500 to make this possible.  

We have also had discussions with issuers where they want to maximize community participation by limiting larger size investments.  While the logistics of managing 5 $100,000 bonds may be simpler than managing 500 $1,000 bonds, many issuers we work with have consistently chosen to make community bonds as accessible as they can, setting low minimums for investment and carefully considering larger investments. Community bonds are always about more than financial returns, both for the issuer and the investor.“

How do community consultations help in finding the right rate of return?

“Community consultations give you the opportunity to go to your stakeholders and see what they think of your bond terms and find out what is most attractive. This can help us decide on the options to include in your offering statement. Sometimes you will find that one bond series might resonate better than others. 

You are never going to be able to speak to everyone, but we can help you select a representative group of your community and gain crucial feedback early on to see what is going to be attractive once you start selling.  This also allows you to bring stakeholders together early and start to build enthusiasm and excitement about the project you are working towards.”

Have another question for us to answer? Get in touch at info@tapestrycapital.ca.