Whether you’re just starting off, or are looking to grow your social business, having a clear idea of what sources of finance are available to you will help make the process smoother.
There are a number of funding routes you can pursue based on your business goals and the specific requirements of your organisation.
In this section we’ve outlined the different aspects of choosing the right source of finance for your social enterprise.
Ways to identify the sources of finance available to your business
When identifying sources of finance, you need to consider factors such as convenience, personal risk and repayment terms. You should also take into account how much it would cost to raise your business capital and service your business debt, as well as the level of control investors will have in the social business. Finally, are you willing to put at risk the particular investor's money?
A Balanced Investment Strategy:
The term ‘balanced investment strategy’ is used to describe a way of balancing risk and return through portfolio allocation and management.
This method of portfolio allocation is split between fixed income securities and equities.
A balanced investment strategy could also generate income, opportunities for growth, and potential for diversification. In this section we look at the three main aspects of this portfolio allocation method.
Balanced fixed capital investment
The most obvious and most easily quantified part of an investment strategy tends to be the fixed capital investment (money that is invested in assets of durable nature for repeated use over a long period). It is also the easiest to raise finance for, since some level of investment can be secured against these capital goods.
For this reason, fixed capital investments receive an undue share of attention when it comes to raising finance. This can result in an unbalanced investment strategy which under-utilises investment in productive capacity.
Under-investment in invisibles (e.g. skills, market development or product development) means there is an insufficient skill to make full use of the investment or insufficient market development to keep it fully occupied. Under-investment in working capital (the cash available for day-to-day operations of an organisation) means no cash to purchase the inputs required to feed it.
As with most aspects of enterprise management, a good investment strategy is about balance, harmony, and synergy. It is better to do a small amount well and thoroughly, rather than a large amount in a costly and unbalanced fashion.
Long-term financing
Similarly, you should phase the investment strategy in a way that’s easy to manage by the organisation and is suited to its growth pattern. This requires a balanced strategy over a period of years.
Long-term planning helps minimise mistakes that often occur when enterprises allow their investment strategies to be dictated by reaction to individual investment requirements. Such investments often reveal a further weakness elsewhere instead of increasing productivity, which means the business realise little or no return on the employed capital.
Varied sources of capital
An enterprise needs to spread its sources of finance across a range of options in order to ensure that it does not fall under the control of an outside organisation. Balancing the sources of investment is as important as balancing its use across the enterprise and across time.
You should also consider alternative strategies to finance your social business that you could follow:
Having decided what is needed to establish or develop the enterprise you should ask yourselves whether it is necessary to have this in house with all the associated investment required or to out-source.
Is the investment down to you at this stage? Do you really need to take on additional investment? Or would it be cheaper, less risky or a way of testing how effective future investment will be by sub-contracting to another business that either can supply or is willing to invest in themselves to supply you? Also, you may not be in a strong enough position to secure investment and will need to seek alternative strategies.
You should go back to examine your business aims. It may be that it is important to make sure that every opportunity is used to expand the size of the operation, either to achieve critical mass, allow for specialisation or to create jobs, but equally this is not a necessary truth. For example it often pays to have out-sourced work until it is proven beyond doubt that moving that function in house will save money. This minimises investment risk and maximises the case to outside investors. Cost reduction through substitution of a currently externally provided service with one that is provided in-house is probably the easiest investment case to prove.
Another alternative is to look around for another small enterprise in a related field to work with, leaving a share of the investment to them. The guiding principle here is that the job, the whole job, must get done and we must do what we are best at and can make a critical quality contribution to. It is not necessary that we do everything or retain absolute control over everything. The principle of enterprising and co-operative rather than paranoid and competitive solutions is a big recommend. You do not have to grow the wheat, mill the flour and bake the bread if your real added value is in making the sandwich.
Similarly, do we need to buy it or is there a rental / lease option and have we done a cost / benefit analysis on the different options?
What are the sources of finance for social enterprises?
There are a variety of different sources of finance available to social businesses. As with private business, the types of finance fall into the categories of equity, grants and debt.
Traditionally, equity is a way of raising finance from external investors in return for selling a share of your business. Debt, on the other hand, doesn’t involve giving up ownership – it usually means borrowing money which you take responsibility to repay with interest in the future.
Grants can be a contribution, gift or subsidy (in cash or in kind) bestowed by a government or other organisation for specified purposes. Certain conditions, such as maintaining a specific standard or having the recipient make a proportional contribution, often need to be met a grant to be bestowed.
There are finance options available only to social businesses, by virtue of their social purpose and their engagement with community and social investors. The primary alternative financing models used by social businesses are community shares and social investments.
Community shares are withdrawable share capital, a form of equity unique to registered co-operative and community benefit societies. Social investments, on the other hand, are investments partially or completely made for social rather than financial returns.
Crowdfunding and financing from family and friends are also viable sources of finance for your social enterprise.