About
BCRS Business Loans (BCRS) is a Community Development Finance Institution (CDFI) based in Wolverhampton, lending to small businesses across the West Midlands. This case study focuses on how an investor can use Community Investment Tax Relief (CITR) on a loan to a CDFI.
In this case the investor is a bank – Unity Trust Bank plc (Unity). Unity was involved in the Regional Growth Fund scheme (RGF), where a commercial loan matched a government grant. Unity made its match investment using CITR.
The principle of the investment and its benefits are applicable to other corporations or banks making an investment using CITR.
Amount raised
Since 2012 BCRS has raised over £4 million in loans from Unity using CITR. In the RGF model, the investment risk is covered by the RGF grant match. Outside of RGF individual CDFIs cover risk in different ways, through obtaining a grant, using assets/reserves, or using a government-backed guarantee, such as the Enterprise Finance Guarantee.
Benefits of using CITR
A key benefit for Unity from using CITR was gaining the additional return – through the tax relief. The additional return meant that Unity lowered the cost of capital for BCRS by rebating a portion of the relief. Unity Trust Bank charges a commercial rate, so lowering the cost of capital reduced a significant cost for BCRS and helps the CDFI become more sustainable. For Unity this is an additional social benefit in addition to catalysing lending to underserved businesses.
Challenges of using CITR
A challenge when using CITR in this way is that the CITR investment is potentially locked into a 5 year loan repayment schedule, due to the CITR regulations. This prevents the CDFI from repaying the bank loan early and taking on new investment from the investor.
Impact
The loans made with Unity’s CITR investment supported a portion of BCRS’s RGF lending. Proportionately this is approximately 96 businesses with £3 million. This created and saved over 550 jobs. The impact of using CITR is potentially more profound as it requires loans to be concentrated in areas of high deprivation, or on traditionally underserved populations (such as women or black, Asian, and minority ethnic owned businesses). Unity reports on the social impact it generates to its stakeholders. The advantage of investing through CITR is not only claiming the relief, but stimulating greater enterprise activity in underserved communities through CDFIs. Unity reports this indirect impact in its annual report.
Lessons learned
This case study of raising investment from bank loans using CITR highlights two key lessons. First, despite the rules and regulations around CITR investment and on-lending, it is not complicated to administer. The complexity factor can deter investors, but CDFIs can provide the necessary background, and HMRC is willing to speak to investors as well about their questions and navigating the regulation. Second, raising investment through bank loans shows the potential for raising large scale investment for the sector using CITR.