A well-run enterprise has a medium to long-term strategy which ensures that it is sufficiently capitalised.
This means it has sufficient money from loans, share investment and retained profits to enable it to pursue its business development plan. If this is not the case the enterprise can find itself in a number of difficulties. For example:
- The enterprise operates at a level where its entire capital base (loans, share investment and retained profits) is insufficient to cover a loss which, in turnover terms (the level of sales), is relatively small. This is known as over-trading.
- The enterprise is unable to respond to demand because it is unable to afford purchases such as labour or raw material. This is referred to as being cash poor.
- The enterprise is unable to respond to new opportunities because of its inability to supply an increased level of sales. In this case, the business would be under-capitalised.
In this section:
There are a variety of different sources of finance available to social businesses. The types of finance, as with private business, fall into 5 types:
A grant is a contribution, gift, or subsidy (in cash or kind) bestowed by a government or other organisation for specified purposes. Grants are usually conditional upon certain qualifications as to the use, maintenance of specified standards and/or a proportional contribution by the recipient or other grant funder.
Debt finance commonly comprises of: short-term bank borrowings (such as overdraft), cash raised through debt instruments (such as bonds), financing such as operating leases and trade credit.
Equity capital is money that is invested in an enterprise that, in contrast to debt capital, is not repaid to the investors in the normal course of business. It represents the risk capital staked by the owners through the purchase of ordinary shares.
Lenders relevant to social businesses are listed on our Sources of Finance page.
There are finance options available only to social businesses, by virtue of their social purpose and their engagement with community and social investors. The main alternative financing models used by social businesses are:
This is a term used to describe withdrawable share capital, a form of equity unique to registered co-operative and community benefit societies.
These are investments partially or completely made for social rather than financial returns.
For a comprehensive interactive list of sources of finance see the Finance Locator finance search tool.
Before reading through the rest of this section, you should have read through the either Starting a Social Business or Growing a Social Business. Having worked through the business planning process outlined in those sections, you should be clear on:
- How much capital you need for fixed capital investments (money that is invested in assets of durable nature for repeated use over a long period), long-term investment in invisibles (for example. investment in skills, market development and product development) and working capital (the cash available for day-to-day operations of an organisation).
- Your ongoing capital requirement.
You can then go onto establish:
- What is a balanced investment strategy for your social business?
- Whether seeking investment is necessary – are there alternative strategies for financing?
A more detailed information on finance terms, understanding finance and raising finance is available in Co-operative UK's Simply Finance guide.
See the Employee Ownership section for a summary of finance sources available to employee ownership businesses.