Accessing appropriate capital is essential for all social enterprises.
There are various funding and finance options available for social enterprises in Australia. You can conceptualise the capital available for Australian social enterprises as a continuum: at one end we there is crowd-funding and donation/grant capital, mainly provided by philanthropy and government, and at the other end, we have impact investment – money to deliver measurable social impact with the expectation of a financial return – and, a little further along the continuum, commercial finance.
The place to look along the continuum for the capital that is appropriate for your social enterprise depends on its stage of development, your level of profitability, your social purpose and impact and your legal structure.
Donation/grant capital tends to be driven by the social issues of interest to the grantor and designed to fund the delivery of a program that creates social good, but not to build or operate a ‘business’ that is self-sustaining in its delivery of impact. Therefore, philanthropic grants may be less receptive to funding operating deficits, even if they are while a sustainable social enterprise is being built and you may need to consider dividing up your capital requirements into ‘packages’ that appeal to various grant-makers.
Most commonly, grants from philanthropy and corporate philanthropy require charitable status, which precludes for profit social enterprise models and recently Social Traders has seen a reluctance for many philanthropic funders to grant to ‘bucket 3‘ social enterprises, even if their purpose is charitable.
Philanthropy Australia, is a peak body for philanthropic organisations and has a database of its members and their granting areas of interest.
From time to time, there may be government grant programs that social enterprises can access, but these are sporadic and may be specific to a particular state, territory, region or local government area; they may also be for a particular social purpose and/or legal form.
In Australia, the impact investment capital available for social enterprises is predominately debt, mostly available through the Federal Government initiated Social Enterprise Development and Investment Funds (SEDIFs) administered by SEFA, Foresters and Social Ventures Australia.
The complexity of impact investing in a social enterprise with the confidence of a financial as well as social return, means that the transaction costs of impact investment are high, resulting in the tendency for impact investment deals to be large. There is also generally a requirement for security, and in instances of no security; the risk-adjusted interest rates are higher.
Recently, there has also been a growth in impact investment loans and equity finance structured by intermediaries such as the Impact Investment Group, Impact Generation Partners and Benefit Capital. Equity impact investors usually generally expect demonstrable and measured social impact as well as a targeted return on their capital, generally paid as dividends paid from the organisation’s earnings. They may require social impact measurement methodologies such as social return on investment (SROI).
Social Impact Bonds, sometimes called Social Benefit Bonds, are a specific form of impact investment that are designed to fund preventative social programs that address areas of pressing social need. Social Impact Bonds are generally not used to fund social enterprises. Repayment to investors is contingent upon specified social outcomes being achieved, for which the government pays the organisation delivering the social program or intervention, who in turn repay investors. Social Impact Bonds are being implemented in NSW, with pilots announced by the Queensland, South Australian and Victorian Governments.
What investment is right for you?
Social Traders’ experience suggests that different types of social enterprise are more or less suited to each end of the grant-impact investment continuum: pilot social enterprises are the realm of donation/grant capital, in which the funder is willing to tolerate a high degree of risk. Conversely, impact investment may be an appropriate and important source of capital for social enterprises that are mature, looking for capital to scale proven capability, have for-profit legal structures (in which risk offers personal reward for owners), have a track record of revenue generation and a relatively high degree of profitability.
What if I am not a pilot and not ready for impact investment?
Through Social Traders on-going capacity building work, we have noticed a financing/funding gap emerging in the social enterprise landscape in Australia. There are many Australian social enterprises that are at earlier stages of development, have not-for profit legal structures (with honorary board or committee members that are not able and/or prepared to offer guarantees as security on loans), are looking for capital to grow their social enterprise at a moderate scale, and/or have business models that are sustainable but cannot service large loans.
These social enterprises are viable and make a real difference to our community, or at the very least with the right capital and support have the potential to do so. Yet they cannot access impact investment and may also not be able to attract grant funding.
Social Traders has learned that the best approach for these organisations is to structure financing that is a blend of grant and patient, unsecured debt and to accompany this with business advice and support to make sure the capital is ‘spent’ to most effectively build the enterprise and position it for success.
The quantum and the relative proportion of debt to grant depends on the business model and social purpose of the social enterprise and the risk profile of the revenue model.