# Use-Credits and investment
*or, How to use fiat currency to build capacity in a non-extractive manner*

[Chris Cook](https://nondominium.co.uk/) & [Dil Green](https://www.linkedin.com/in/dilgreen/) March 2020
License: [CC BY-ND](https://creativecommons.org/licenses/by-nd/4.0/)

### Overview
Social Enterprises providing value can receive investment without taking on debt or paying returns in cash. This paper shows how 'use-credits' manage risk at every stage.

We illustrate, through a simple example, how an issue of 'use-credits' (*more technically, 'Use Credit Obligations' or UCO*) in return for money for investment in capacity can be beneficial for all stakeholders around the issuer's purpose.

### Context - an example of a typical problem

A community kitchen that delivers ready meals to housebound people has been asked to increase capacity by the Local Authority (LA) to help meet their new requirement to support 'Shield' category individuals in the Covid-19 crisis.

They have a block, though, which is that they need a new fridge; this will cost £1k, which they don't have (they also can't borrow any more in time to meet the LA's decision date, even if they wanted to).

They ask their funders for a pump-priming loan or grant, but the fund is swamped by other requests to be evaluated. Everyone's in crisis.

*No new capacity. Opportunity missed. Needy clients not serviced. No new impact.*

### The Use Credit solution

Instead of asking for a loan or a grant, they offer the fund a deal: 250 ready meal vouchers in return for £1k (the kitchen produces meals at a cost of £4). *These vouchers are what we call 'use-credits', or 'UCO'.*

Ready meals cost £5 - so this represents a 25% RoI on paper. The fund knows the kitchen, and believes in their ability to make good on the increased capacity.

So the deal goes to the front of the queue, as it comes with a clear and believable RoI.

Of course, there are conditions on the redemption of the vouchers, but they are simple: max 50 tokens per month to be redeemed, the first redemption 3 months after the fridge is commissioned.

The fund knows the LA, and can verify that the kitchen is sure to get the contract if they can deliver. They also get the LA to agree that it will buy the tokens if the price is right.

The fund's investors like this model when compared to the usual 'pump-priming' justification, which has only loosely measurable impact and feedback - they like the idea that outcome gets measured precisely both in financial terms and in terms of meals delivered - so the deal is made.

The kitchen takes on an enhanced supply contract from the LA, and the fridge is installed.

The fund verifies that new fridge is enabling increased supply a few weeks after delivery - the investment has been de-risked.

At this point, the fund decides to sell the vouchers to the LA - well in advance of the 3 month maturation date. The LA's contract with the kitchen pays £4.50 per meal. The LA agrees to buy the vouchers (with their £5 face value) for £4.25 each, as it can easily verify that the kitchen now has the capacity to serve them.

### Outcomes

The fund gets a 6.25% RoI in a turnaround time of six weeks, and can use the cash to help other clients.

For the kitchen, the pump-priming was effectively an interest-free loan (£4 x 250) with no hassle, and is paid off in just over 8 months. The fridge increased their capacity by 100 meals / month, and the demand is there - so they increase their turnover in those 8 months by £2750 (800-250 meals x £5), and in each month from then on by £500.

The LA saves 5.5% on the delivery of 250 meals and, more critically, makes significant progress towards its imposed targets. It also gains a little bit of forward planning security, as it knows how it will pay for 50 meals a month for 5 months.

The investors see reports with measured additional impact (funds effectively applied, cash available for re-investment, meals delivered).

Needy housebound people get meals they would not otherwise have got, at decreased cost to the state.

Everybody gets what they want, everyone is better off in cash terms, risk was minimal, opportunity costs were low.

The next time the kitchen comes back with a similar proposition (say for a more significant capacity increase - or for a new enterprise that bakes bread), everyone is more willing to take it seriously.

### Key Takeaway

The RoI for the fund was not obtained from the needy clients, or from the kitchen - but from the LA - another funder - who critically also received an RoI. The capacity *and* throughput of the social impact economy has been enhanced through a viable fiat investment that has taken nothing out of the sector it was designed to support.

#### Reference
[Introducing the ECO - Chris Cook](https://bellacaledonia.org.uk/2018/08/21/energising-scotland-introducing-the-eco/)