How to… create a local lending hub

The rapid expansion of the Fredericks Foundation couldn’t have come at a better time for businesses shunned by the banks. Austin Macauley looks at the model behind its success.

Two and a half years is clearly a long time in microfinance. When New Start last caught up with Charles Dodwell, chief executive of the Fredericks Foundation, his organisation was working in five areas of England. That figure has since risen to 20 and the expansion shows no signs of slowing down.

Back in 2010 the foundation, known in the sector as Freddie’s, had just launched its ‘hub’ model as a way to create a ‘benevolent franchise’ and speed up the growth of institutions lending to enterprises in areas shunned by the banks.

Surrey-based Freddie’s, set up by entrepreneur Paul Barry-Walsh, had been lending in the southeast since 2001 and in 2008 began to branch out into the southwest. Its expansion began by partnering with existing community development finance institutions (CDFIs), Gloucestershire Development Loan Fund and Wessex Reinvestment Trust, which had run into difficulties. The capital was there to lend but, as many CDFIs have discovered, finding funding to run the operation was much more difficult. Fredericks Gloucestershire and Fredericks Wessex were created – and with it, a model that could clearly be replicated.

Since then, hubs have been launched in Wiltshire, Cornwall, Devon, Bristol and Bath, London, Somerset, Kent, Oxfordshire, Buckinghamshire, Northamptonshire and, most recently, in Cambridgeshire, Nottinghamshire and Lincolnshire.

Freddie’s expansion, says Dodwell, was ‘catapulted’ in 2011 by a successful £1.8m Regional Growth Fund (RGF) bid with ten community foundations. The foundations’ aim to bring philanthropists together with community projects and individuals in need chimes with Freddie’s focus on bringing financial support for small businesses into disadvantaged areas. Hubs have been set up in each of the ten areas. Dodwell says there’s a natural fit: ‘We have a shared ethos in terms of targeting needy areas and people, the difference being they do grants and we do loans.’

HOW THE HUB WORKS
Although Freddie’s developed it, Dodwell sees no reason why the hub model can’t be replicated by other CDFIs. ‘I think anybody could do it,’ he says. ‘There’s nothing special about the way we do it. Most CDFIs have a very strong presence within their community. The secret is to replicate that in every community they serve.’

The two key features of the hub model are the appointment of a client manager and the establishment of an advisory board. While Freddie’s provides a trained client manager, back office functions, ongoing support, contacts and lobbying clout, putting together a board of key stakeholders is a joint effort with those on the ground – in particular, whoever is championing the cause. The foundation sums up what you need as follows: capital to lend and revenue to cover overheads; as much pro bono help as you can get; a champion; a strong and committed advisory board; and a band of willing volunteers.

Part of the client manager’s role is to identify the key contacts – whether they be potential donors and investors or prospective clients, develop a relationship and assess the lie of the land. There’s no micromanagement from Freddie’s head office and unlike other franchises, it’s not about creating a generic product. The hub will only work if it’s shaped around the unique circumstances of the locality.

LINKING LOCAL DONORS WITH LOCAL START-UPS
The link up between Freddie’s and the community foundations highlights the benefits of partnering with an organisation that’s already embedded in the community. The nature of the foundations’ work has made the job of the client manager much easier thanks to their contacts with local donors. The fact that the RGF bid involved foundations generating match funding from their supporters has immediately put the hubs in a stronger position in terms of lending capital.

They have local donors who support them, some of whom are ex-business people and who understand what we are trying to do. ‘We have benefited from that,’ says Dodwell. ‘But also the community foundations have become better known in the business community through working with us. It’s been a two-way street.’

Donors have been keen to get involved in the hubs, offering their knowledge and experience to clients and taking part in lending panels. ‘Very often the mentors’ support can be the difference between success and failure,’ Dodwell says.

It’s a view shared by Rosemary Macdonald, chief executive of Community Foundation for Wiltshire and Swindon (CFWS), who helped to bring Freddie’s and the foundations together prior to the RGF bid. Fredericks Wiltshire had been struggling to find the capacity needed to develop the necessary contacts.

‘I felt it would fit with us and said they should link up with community foundations because we have all sorts of contacts,’ she says. ‘Our role has been to build up the loan pot and that’s a very sensible thing to do. But what we have found with working with Fredericks is it’s given community foundations access to people who wouldn’t consider giving to community foundations. A lot of entrepreneurs have a very strong motivation to help others.’

The link up has also created a seamless route for those seeking help. Half of CFWS’s grants go to the voluntary sector while the remainder goes to individuals, for example to cover university fees or the costs of attending a vocational college course. In the latter’s case it could see someone receive a grant to learn a trade and then be referred to Freddie’s for a loan to start up a business.

Macdonald adds: ‘There’s a real problem with business mentors at the moment because we no longer have Business Link. But with Freddie’s you don’t just get the loan you also get a mentor.’

FUTURE PLANS
Once the ten RGF-backed hubs are bedded in, Dodwell says the plan is to work with some of the other 48 community foundations across the UK. ‘We think we can continue the expansion with other community foundations. If my maths is right, we now cover 22 million people in England. We will cover every community eventually where we feel we are needed.’

Jennifer Tankard, spokesperson for the Community Investment Coalition – a partnership of national organisations campaigning to promote access to affordable finance – says it’s never been more crucial for the microfinance sector to expand.

It is widely accepted that economic growth is dependent on the ability of SMEs to survive and thrive but many continue to struggle to get access to the affordable finance they need,’ she said. ‘CDFIs have a critical role to play in providing fair finance but their current reach and scale is dwarfed by the sheer level of need. Anything that helps CDFIs step up to better meet this need is welcome. Although it is early days for the Fredericks Foundation model, it is definitely one to watch.’

Like many CDFIs, Freddie’s faces a continual struggle to generate core funding to cover operating costs. Although it has been in the enviable position of having a benefactor in Paul Barry-Walsh to support it, the charity has gradually moved away from financial dependence on its founder. The expansion Freddie’s has enjoyed thanks to its link up with community foundations could prove the key to continued success.

As Dodwell says: ‘Part of my vision was to be less reliant on Paul and that’s the position we are moving to. I have always wanted to make us financially independent and the way to do that is to go for scale.’

‘Microfinance is very hard to get and many lenders have pulled out – understandably, because it’s so risky. Our expansion has been quite timely. If there’s a need we will go there.’

But he’s adamant that CDFIs shouldn’t view themselves as being in competition with each other.

There are other CDFIs that work in much cleverer ways than we do. We can all learn from each other. There’s room for all of us, and more.’