Stakeholders involved: Stakeholders will depend on the nature of the project. In the case of social housing renovation, stakeholder may include: municipality, renovation partners, NGOs, research institutions.
Thematic area where this IFS has been used : Energy transition, Social inclusion, Affordable housing
Applicable areas/purpose: Provision of funding to achieve social, environmental and economic impact, which is replenished over time
Example: ICCARus
What is it?
The revolving fund is a financial scheme used to continuously replenish and reuse capital for specific purposes, such as financing projects or providing loans. As the loans get reimbursed, the capital is reloaned for another project, allowing it to be used repeatedly.
In addition to financing projects, revolving funds can also include a technical assistance component. This means that, alongside financial support, beneficiaries receive guidance, training, or expertise to ensure the successful implementation of their project. For example, a municipality using a revolving fund for energy efficiency projects might also provide businesses or homeowners with advice on how to optimise energy use.
Step-by-Step
Step 1: Initial capital allocation
The fund begins with an initial pool of capital, typically provided by a government agency, nonprofit organisation, or financial institution, or through a grant. The capital is then used to finance loans, grants, or specific projects.
Step 2: Distribution of funds
The fund provides financial assistance to recipients and are used for their intended purpose, such as undergoing housing renovations. The funds are provided with specific conditions and obligations as to the return of the loans.
Step 3: Revenue generation or repayment
These projects generate capital – either through revenue generation or savings) – and are re-allocated into the fund. For example, in the case of housing renovations, once the housed are alienated (i.e., sold, rented, or is transferred through inheritance), the money used for the renovation of the house comes back into the revolving fund to renovate other houses in the future.
Step 4: Re-investment into new project
As funds are repaid and returned to the initial pool of capital, they can then be redistributed and reinvested into new projects, ensuring a continuous cycle of financial support.
Foreseen costs
Revolving funds require an initial capital allocation, which varies based on the scope and type of project being financed. Beyond pooling of capital, ongoing costs include legal, financial, and administrative oversight to ensure proper fund management. Continuous monitoring, reporting, and operational support are essential to maintaining the fund and enabling its long-term reinvestment cycle.
Advantages of using the IFS
General Advantages
Self-sustaining and revenue generating: A revolving fund ensures financial sustainability by reinvesting repaid funds or generated revenue back into the system. This allows initiatives to continue beyond the initial investment and promote financial sustainability.
Transferability: Revolving funds can be applied across various sectors, making them a versatile financing tool for urban authorities.
Advantages specific to social housing renovations
Improved housing conditions: The revolving fund model offers a promising approach to improving housing conditions and supporting vulnerable populations. Financing through the fund enables renovations for homes in poor condition, addressing housing needs for those who are most disadvantaged.
Increased resale value: Following renovation, the value of the home has increased, suggesting there might a potential future monetary benefit for the residents.
Challenges associated
High implementation costs: Setting up a revolving fund requires significant initial capital, which may require government grants or private investors.
Unpredictable timeline: The uncertainty of loan repayment timings for the return on investment makes financial planning more difficult. Delays in repayment can disrupt the fund’s cash flow, affecting its ability to finance new projects and maintain sustainability.
Building trust with participants: For a revolving fund to succeed, borrowers must have confidence in the system and their ability to repay loans. Transparency in fund management, clear communication of loan terms, and guidance from financial advisors or social counsellors can help build trust.
Helpful tips
Engage with experts: Consult with sector-specific experts (e.g., housing, energy efficiency) and financial specialists to ensure informed decision-making and effective project implementation.
Build strategic partnerships: Collaborate with government agencies, nonprofits, private investors, and community organisations to share responsibilities, pool resources, and enhance expertise.
Strengthen capacity building: Provide training, workshops, and technical support to equip stakeholders with the skills needed for effective project execution and fund management.
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