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Community Interest Companies (CIC) hold a unique position in the UK marketplace by delivering social value, jobs and much needed services to their communities and local economy. Sadly, many CIC directors are facing increasing financial pressures.
One of the results of the difficult economy we have at the moment is that we are seeing increasing enquiries about CIC insolvency. In most cases, the problems are not caused by poor management or bad business ideas, but by an economy that has changed rapidly and now makes these enterprises hard to sustain.
While they may operate with a different structure, like all UK businesses, CICs have been impacted by inflation. They are also subject to the same changes in employment costs. So, yes, it’s fair to say from one perspective that they are facing the same issue as a standard limited company. Why then are they potentially facing harder times than standard limited companies? Well, when you did deeper, that helicopter view of similarity is very different at a practical level.
Many CICs operate labour-intensive services and often even have creating working opportunities as part of their remit. That potentially makes them particularly vulnerable to rising staff costs. As a result, it is likely that the increases to the National Living Wage and employer National Insurance contributions have significantly increased payroll costs for a CIC.
Add to this that, unlike a traditional limited company, CICs often cannot pass these increases on to customers without undermining their social purpose.
For many CICs, all this results in shrinking margins, reduced cash reserves, and difficult financial decisions that can clash with their social mission. Situations like these are often the early warning signs of potential CIC insolvency. So, if that resonates with your business, you need to act.
Unfortunately, in the desire to ‘do the right thing’ directors of CICs will sometimes delay addressing the issues. It’s an understandable, but rather dangerous reaction because meaning well doesn’t always convert to resolving a problem.
Key point: Rising operating costs are a leading cause of CIC financial difficulties, and often these hit harder than with a limited company. Assess your situation honestly and take advice if you need it.
It’s important to factor in that CICs don’t enjoy the same financial advantages as charities. CICs sit in a difficult middle ground between the two states of commercial enterprise and charitable organisation. While there are some advantages to being a CIC, they do not benefit from key charity tax reliefs such as Gift Aid. Grants are available, but these are few and far between because many grant providers restrict funding exclusively to registered charities. At the same time, the CIC asset lock and dividend cap, which are there to ensure a Community Interest Company’s assets and profits are permanently dedicated to public benefit, can deter private investors. The sad truth is that the kind of philanthropic investment CICs attract is less likely in the current market, and customers will also tighten their purse strings.
They are also prone to single contract structures and reliance on donations, yet when the source of income is limited, a CIC is in the same precarious position as any business would be. With limited sources of income, they are one change of revenue away from a real problem, but as a CIC, they find diversifying a lot more difficult.
Key point: The CIC status has benenfits but it can actually restrict funding options and increase financial risk.
We see what we call the ‘grant trap’ frequently, and it is possibly the most devastating of the issues CICs can face. We call it the grant trap because it is very easy to fall into and almost impossible to climb out of.
What can and frequently does happen is that a CIC is initially partially funded by a repeating or long term grant. Sometimes these pay out over an extended period of time, even years. Practically speaking, the CIC is granted a regular sum of money as support for the work they do, and therefore, this becomes part of their cashflow, sometimes for years in advance. Which is fantastic for stabilising the financial outlook for the business.
The trap happens when, out of the blue, the money stops because of external changes. Funding reallocation at the local or national government level, for example.
Taking that helicopter view again, I suppose you could liken this to a limited company suddenly losing a key, high-value, client. However, once again, that is a little unfair because at a practical level, the impact is much higher. Firstly, remember that the CIC is not operating for the benefit of shareholders and therefore, grant money will often subsidise operations. More importantly, there is often little or no warning that the money is going to stop.
We advise regular limited company businesses to build a really good relationship with their customers, and part of the reason for that is so that any financial problems that are coming down the line are identified early. They then have time to manoeuvre and decrease the reliance on a customer. With a grant, there is often little or no warning. The money simply stops, and the CIC is left with a hole in its finances that it cannot repair. Where a limited company has time to adjust, a CIC often does not.
Key point: Grants can be a double edged sword. If they suddenly reduce or stop entirely, it could spell financial disaster.
Many CICs experience irregular income patterns. Grant funding delays, contracts that are paid in arrears, and, where it exists, donation income, can fluctuate sharply. When this happens, an otherwise viable CIC can struggle to meet short-term obligations. The PAYE, VAT, rent, supplier payments and so on, suddenly become a problem. This is one of the most common operational pressure points and can soon result in formal CIC insolvency procedures.
Key point: Cash flow, not profitability, can quickly become the focal point for insolvency for CICs.
Many CIC directors only seek professional advice when they believe insolvency is inevitable. I get it, I see why, I understand that you have invested time, effort and a lot of love into your Community Interest Company and want to battle through, but the earlier your financial issues are addressed, the more options that could be available.
Early advice may allow time to:
I wish I could guarantee that early intervention would prevent formal CIC insolvency, but sometimes that isn’t possible. If it isn't, and insolvency is the right route, then the earlier you know, the easier and less traumatic the process will be.
Key point: Early advice preserves options and can ease things for CIC directors both legally and in terms of the stress of the situation. Knowing where you stand and what to do next is always the best option.
Running a CIC carries additional emotional pressure. Directors are not just responsible for a business, but also staff, service users, and often wider communities. That is not something that can be swept under the rug. For the director of a CIC, insolvency is potentially even more difficult because the aims of the business were never shareholder profits; it was the far more emotional aim to be a benefit to others.
Uncertainty will only add to your problems, so at Smart Business Recovery, we provide clear, practical advice grounded in decades of experience. Our role is to help CIC directors understand their position, their responsibilities, and their options. Whether that involves recovery, restructuring, or formal insolvency, we will work with you towards the best option, and we will do it without judgement or jargon.
For now, here is our instant advice if you are a director of a CIC. Whether you are facing financial difficulties or just concerned about the future, start with these actions to get a clearer picture of where you stand.
If you are concerned about current or future CIC-based financial problems or potential insolvency, take action early: