Options for Financing a Social Enterprise

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					Options for Financing a Social
Procuring Contracts
Procurement is the process of purchasing goods or services from an external supplier.
Agencies in the public, private and voluntary sectors procure goods and services, and
there are potential markets in all three sectors for social economy organisations.

Public Sector Procurement

Many social economy organisations now regard the public sector to be an important
market for their goods and services. Whether your organisation is selling recycled
furniture or providing supported employment opportunities, there are numerous
opportunities to engage in business with the public sector. Business relationships
between social economy organisations and the public sector generally come in one of
three forms: grants, service level agreements and contracts.

      Grants: grants from the public sector are lump-sum payments offered on a
       time-limited basis to undertake a project or provide a specified service.
       Sometimes public sector grant funding is offered to cover core costs.
      Service level agreements are payments for an agreed level of service. SLAs
       are generally negotiated privately between the organisation and the public
       authority, rather than competitively tendered. Service level agreements should
       be legally binding, which means that the pre-agreed payment should not be cut
       or reduced if the service has been provided satisfactorily.
      Contracts on the other hand tend to be the result of a competitive tendering
       process. In other words, the purchasing body advertises for suppliers of
       required goods or services. Potential suppliers submit tenders, or offers, for the
       work, and the public body selects the one it believes will offer best value. You
       may be competing with other suppliers from the social economy, and with
       private sector companies. Contracts over a certain value (find current
       threshold) must be advertised throughout the European Union, and it is illegal
       for public bodies to discriminate against non-local suppliers. However, it is
       not illegal for ‘added social benefit’ to be written into the tender document,
       and this can help social enterprises compete for contracts.

Public bodies that might procure services from the social economy:

      Midlothian Council: Procurement within Midlothian Council is handled on a
       division by division basis. Over the next few months, SEAM will be working
       to produce an information guide to procurement in Midlothian, which will
       offer further information about the processes used by each division, and will
       contain a list of key contacts. The guide will be available here. Meanwhile,
       organisations interested in developing business links with Midlothian Council
       should approach the division relevant to their work or make contact in the first
       instance with Rebecca McKinney from the Regeneration Development Team.
       Further information on Midlothian Council’s services can be found at
      Lothian Health Board
      Scottish Executive
      The Scottish Parliament
      Job Centre Plus

The Equal Programme: Strengthening the Social Economy Development Partnership
has produced a guide, entitled Tendering for public sector contracts. The guide
contains useful general advice about procurement. This is available to download, or to
order in hard copy, from the Social Economy Scotland website:

Social economy organisations trade in a wide variety of ways. Often, they trade
services - for example, childcare or training - at rates accessible to their beneficiary
groups. Others trade goods - for example, recycled furniture or other products. Many
viable businesses can be run as social enterprises: guesthouses, restaurants, arts and
leisure activities, gardening services... the list is potentially endless. Some voluntary
organisations also engage in trading activities that do not necessarily relate directly to
the ‘primary purpose’ laid out in their constitution, but which generate revenue to
support their core services. Examples include running shops, hiring out workspace,
and running cafes.

There is a legal difference between ‘charity’ shops, and other types of trading activity.
The financial benefits of charity shops are that as long as they retail donated goods
there is no tax on profits, zero rating on VAT and the premises qualify for a
mandatory 80% relief on uniform business rates. The tax treatment differs from other
trading activities because the sale of donated goods is seen as simply the realisation of
the value of a gift. For more guidance see SCVO at

For further advice about the legal limitations on charity trading, see Things to
Consider Before Starting.

Social Firms
Social Firms Scotland define a social firm thus:

A social firm is a type of social enterprise that focuses on job creation and providing
supported employment opportunities for people with a disability or disadvantage in
the labour market.

      A Social Firm is a business (1) created for the employment of people with a
       disability or other disadvantage in the labour market.
      It is a business that uses its market-orientated production of goods and services
       to pursue its social mission. (1)
      A significant number of its employees will be people with a disability or other
       disadvantage in the labour market.
      Every worker is paid a market rate wage or salary appropriate to the work
       whatever their productive capacity.
      Work opportunities should be equal between disadvantaged and non-
       disadvantaged employees. All employees have the same rights and

(1) At least 50% of income is derived from sales (i.e. not public, private or voluntary
(2) At least 25% of the employees will be people with a disability or disadvantage
who are integrated into the staff of the business and employed on the same terms and
conditions as other non-disabled staff, having the same rights and responsibilities.

The Midlothian Employment Action Network is working in partnership with Social
Firms Scotland to explore potential social firm business opportunities in Midlothian .
Anyone interested in learning more about this work should contact Norma McNeill :
norma.mcneill@midlothian.gov.uk, or on 0131 271 3679.

More information on social firms can be obtained from www.socialfirms.org.uk.

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