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?
In addition to ensuring that you have a balanced investment strategy, you should also consider alternative strategies to finance your social business that you could follow.
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.
Explore the different sources of finance available for your social business:
Loans, short-term bank borrowings, cash raised through debt instruments, leases and trade credit all fall under the category of debt finance.
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 or sale of ordinary shares.
Supply chain finance
Supply chain finance maximises the amount of cash in your business by reducing the amount of money tied up in stock, held by your suppliers or expected from customers.
Social investment is a type of equity, quasi-equity, or debt investment in a social business where both social and financial return are expected by the investors.
Venture capital and business angels
The finance to start up and grow a social enterprise is provided by individuals investing their personal funds, or by companies investing other people's money into shares of your business.
Reinvestment of retained profits
If your social enterprise is making sufficient profits, you can reinvest them into the business to increase the value of the business without having to give up ownership or commit to meeting external conditions.
People and organisations with a vested financial, social or environmental interest in your business may invest in the enterprise to help it achieve its social purpose.
A balanced investment strategy
A strong investment strategy involves the balanced use of capital as well as the balanced introduction of capital and the balanced sourcing of capital. Balancing the sources of investment is as important as balancing its use across the enterprise and across time.
Alternative strategies to finance a social business
Once you’ve established what you need to start or develop a social enterprise consider whether it is necessary to take on additional investment at this stage. There may be alternative strategies available to you that are both less risky and less expensive.
Find lenders relevant to social businesses
Social business help and support from Business Wales
Business Wales offers a wealth of information, advice and guidance for business owners. Below, we’ve listed some useful resources on social business sources of finance.