Social enterprise lending

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Social enterprise lending is a form of social finance which refers to the practice of offering loans and other financing vehicles below current market rates to social enterprises and other organisations pursuing social goals. This is often referred to as 'patient lending', or financing with 'soft' terms. Patient lending recognises that projects with social outcomes often reach profitability later than commercial projects. Softening the terms of a loan means that a social lender may offer provisions such as longer loan terms, lower interest rates and repayment 'holidays' where capital and interest repayments and are not due until the project is profitable. Social lenders might also offer small grants as part of an investment package.

Social finance is an approach to managing money which delivers a social dividend and an economic return.

Loan transfer of money that must be repaid

In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed.

Financial capital is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. retail, corporate, investment banking, etc.

Contents

History and development

Social lending and social investors increased in popularity and number in the 1990s, in part as a reaction to the trend within charities, social enterprises and other voluntary and community organisations towards increasing their percentage of earned income and away from depending on shrinking sources of grant income. As a non-profit organisation develops new income streams, there is typically a funding gap between necessary investment in capacity, staff or infrastructure and profitability. This trend coincided with an increased tendency, in both the US and the UK, of government to turn to the voluntary and community sector to offer public services and provide solutions to social problems. Finally, the proliferation of venture capital firms in the tech boom of the mid-nineties highlighted the successful practices of venture capitalists and other private investors, and those practices eventually spilled over to the non-profit world. This trend began in the US, most notably on the west coast, and eventually spread to the UK and Europe.

Venture capital start-up investment

Venture capital (VC) is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. Because startups face high uncertainty, VC investments do have high rates of failure. The start-ups are usually based on an innovative technology or business model and they are usually from the high technology industries, such as information technology (IT), clean technology or biotechnology.

Social lending and venture philanthropy are the direct result of applying private sector funding models to the public or voluntary sector. This is demonstrated by the recent trend for social investors to offer performance-related loans (often referred to as 'quasi-equity') and share equity in social businesses with the appropriate legal structure; two practices which are directly borrowed from venture capital.

Venture philanthropy is a type of impact investment that takes concepts and techniques from venture capital finance and business management and applies them to achieving philanthropic goals. The term was first used in 1969 by John D. Rockefeller III to describe an imaginative and risk-taking approach to philanthropy that may be undertaken by charitable organizations.

Advocates of social lending argue that earned income is the better way to ensure long term sustainability for the voluntary and community sector and the only way for social enterprises and social businesses to succeed. And loan finance is best suited to sustain organisations during and beyond the growth or start up period because a loan focuses financial discipline and prepares an organisation to receive commercial finance in the future. Additionally, social lenders argue that the interest they earn can be recycled to benefit other organisations and is therefore, more efficient for the social sector overall than a grant.

The sources of funds vary across the spectrum of social lenders but most often includes government monies or donations from private individuals and foundations or trusts. Lenders may restrict themselves to funding newly started organisations or may fund organisations throughout their life cycle; however the focus of investment is usually in building the capacity of the investee to achieve their stated social outcomes while becoming financially sustainable.

In Britain

In the British context, the largest of these types of social investors are Triodos Bank, Charity Bank and Unity Trust Bank. All three invest in social enterprises and third sector organisations that are pursuing social goals; Triodos Bank also has an additional interest in financing projects with environmental benefits. These institutions offer full-service banking and aim to serve organisations that cannot access traditional lending from commercial banks, and a majority of their customers are likely to be first-time borrowers.

Triodos Bank company

Triodos Bank N.V. is a bank based in the Netherlands with branches in Belgium, Germany, United Kingdom and Spain. It claims to be a pioneer in ethical banking. Triodos Bank finances companies which it thinks add cultural value and benefit both people and the environment. That includes companies in the fields of solar energy, organic farming or culture. The name Triodos is derived from the Greek "τρὶ ὁδος - tri hodos," meaning "three roads". Triodos Bank's balance sheet was worth EUR 5.3 billion by the end of 2012. The bank was founded as an anthroposophical initiative and continues to honor the work of Rudolf Steiner as the inspiration for its approach to banking.

Unity Trust Bank

Unity Trust Bank plc provides specialist banking services to trade unions, charities and other organisations that operate in the not-for-profit sector in the United Kingdom and its remit has expanded to include profit-with-purpose businesses. Founded in 1984; head office is located at Four Brindleyplace, Birmingham.

The voluntary sector or civic sector is the duty of social activity undertaken by organizations that are non-governmental nonprofit organizations. This sector is also called the third sector, community sector, and nonprofit sector, in contrast to the public sector and the private sector. Civic sector or social sector are other terms for the sector, emphasizing its relationship to civil society. Given the diversity of organizations that comprise the sector, Peter Frumkin prefers "non-profit and voluntary sector".

A fourth large lender, Futurebuilders England, made £145 million of government-backed loans and grants between 2004 and 2010 but is closed to new applications. [1]

Futurebuilders England was a social investment fund in the UK. The fund was invested in third sector organisations delivering public services to improve their financial and strategic capability.

A government-backed loan is a loan subsidized by the government, which protects lenders against defaults on payments, thus making it a lot easier for lenders to offer potential borrowers lower interest rates. Its primary aim is to make home ownership affordable to lower income households and first-time buyers.

All of the funds are only intended to support services for beneficiaries in England and funding must complement, not compete with, any possible commercial lending. The primary offering is a traditional loan at 6% which may be accompanied by professional support and grant funding where appropriate. The loan repayment period is variable, dependent on application, but the maximum period is 25 years with interest and repayment holidays of up to two years.

Triodos Bank finances companies, institutions and projects that add cultural value and benefit people and the environment, with the support of depositors and investors who want to encourage corporate social responsibility and a sustainable society. It is a pioneer in ethical banking. Triodos Bank finances companies which it expects will add cultural value and benefit both people and the environment. The bank uses money deposited by close to 100,000 savers and lends it to hundreds of organisations, such as fair trade initiatives, organic farms and social enterprises. [2]

Charity Bank provides loan finance and advice to enable charities, community associations, voluntary organisations, community businesses and social enterprises across the UK to grow. It often lends where banks or building societies either will not make a loan at all, or will only do so on unaffordable terms. [3]

Unity Trust Bank aims to put social change, social benefit and community involvement at the heart of what it does. It uses some of its profits to re-invest in the business to help more organisations in the future. The remaining profits are returned to its shareholders – trades unions and the Co-operative Bank – which are both part of UK civil society. [4]

Since 2012, Big Society Capital has acted as a social investment wholesaler, investing in intermediaries which in turn provide finance and support to charities and social sector organisations. Its funds come from dormant bank accounts and from four UK banks. [5]

Other social lenders in Britain include Adventure Capital Fund, Venturesome (an initiative of the Charities Aid Foundation), London Rebuilding Society, the Social Enterprise Investment Fund (formally Local Investment Fund), Community Development Finance Association, Cooperative and Community Finance, Bridges Community Ventures and the Capital Fund.

See also

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Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own, or until it is ready for further investments. Seed money options include friends and family funding, angel funding, and crowdfunding.

A community development financial institution (US) or community development finance institution (UK) - abbreviated in both cases to CDFI - is a financial institution that provides credit and financial services to underserved markets and populations, primarily in the USA but also in the UK. A CDFI may be a community development bank, a community development credit union (CDCU), a community development loan fund (CDLF), a community development venture capital fund (CDVC), a microenterprise development loan fund, or a community development corporation.

Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve a reasonable gain in financial return while delivering social impact to the world. It deviates from the traditional venture capital model, which focuses on simple risk and reward. However, there are various organizations, such as venture philanthropy companies and nonprofit organizations, that deploy a simple venture capital strategy model to fund nonprofit events, social enterprises, or activities that deliver a high social impact or a strong social causes for their existence. There are also regionally focused organizations that target a specific region of the world, to help build and support the local community in a social cause.

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CAF Venturesome was founded in 2002 in the UK and is an innovative pioneer of financial instruments for supporting social enterprises - and is an example of the growing market for funding social entrepreneurs. Social entrepreneurship as a fundable activity has grown through new financing provided by not only Venturesome but also the Impetus Trust, Ashoka: Innovators for the Public, Skoll Foundation and Futurebuilders England. By providing risk capital and customised financial advice to small and medium-sized social-purpose organisations, it aims to build their capacity to achieve lasting social impact. Venture philanthropists supporting the work of Venturesome want to see their money working hard, recycling 4 or 5 times in contrast to the one-off donation of a traditional grant-maker. Venturesome uses investment mechanisms such as underwriting, unsecured loans and equity-like instruments.

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Venture debt or venture lending is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture debt can complement venture capital and provide value to fast growing companies and their investors. Unlike traditional bank lending, venture debt is available to startups and growth companies that do not have positive cash flows or significant assets to use as collateral. Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default.

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Big Society Capital Limited (BSC) is an independent social investment institution in the United Kingdom, which provides finance to organizations that support front-line social sector entities to help them grow. Social investment is about lending or investing money to achieve a social, as well as, financial return. BSC was the world's first social investment institution of its kind, established by the Cabinet Office and launched as an independent organisation with a £600m investment fund in April 2012. The investment fund comes from dormant bank accounts via an independent Reclaim Fund and four leading UK high street banks. The institution was set up as part of the Dormant Bank and Building Society Accounts Act 2008, which defined BSC as an organization that exists "to enable other bodies to give financial or other support to third sector organisations".

Hattha Kaksekar Limited or HKL is a microfinance institution and a deposit-taking institution in Cambodia. In terms of loan portfolio, HKL is ranked fourth and it has the third largest saving portfolio among Cambodia MFIs.

Capital for Enterprise Limited (CfEL) was a limited company in the United Kingdom owned by the Department for Business, Innovation and Skills (BIS). CfEL was responsible for managing BIS's financial schemes, such as venture capital funds and loan guarantees, aimed at helping small and medium enterprises (SMEs). It invested over £1.8 billion from its formation and alongside private capital provided £6.5 billion in credit for SMEs. It ceased operating independently on 1 October 2013 and became part of the British Business Bank.

Social Investment Business

Social Investment Business (SIB) is a UK registered charity and trading company that offers loans, grants and other financial products to charities and social enterprises.

References

  1. ↑ "A Tale of Two Funds: The management and performance of Futurebuilders England". Social Investment Business. 24 November 2016. Retrieved 24 April 2017.
  2. ↑ Triodos Bank
  3. ↑ Charity Bank
  4. ↑ Unity Trust Bank
  5. ↑ "Annual Review 2015" (PDF). Big Society Capital. Retrieved 24 April 2017.
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