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Social Financing and its Types 

Social Finance

We are living in a world where most business enterprises care more about personal benefits rather than social benefits. But gradually, many of them are realising the need for sustainability and social responsibility. For some, the reason is that they actually care about their surroundings, while for others, it is a matter of reputation.

The enterprises that innovate to solve problems of the world, that might not be just driven by the goal of profit-making are called Social Enterprises. These include non-profit and for-profit ventures, and their returns blend social benefit and financial revenues. Social finance is basically lending or investment into such social enterprises or others that consider themselves to be charities, co-operatives or impact-focused organisations. It may not necessarily come under any grant or donation but is a loan that is repayable with interest.

When a business satisfies a social or environmental need, it becomes even more difficult to secure funds, and funding options become scarcer. The fundamental question that they are likely to face from investors is – ‘Can you generate enough revenue to cover your costs and grow your activities? Can you pay us back with interest?’ But the good news is that many social finance options have become available nowadays. There are also some social venture firms that evaluate businesses on the basis of their environmental and social performances as well as financial success.

Social financing involves a wide range of investment strategies and solutions across asset classes. It encompasses various areas like domestic resource mobilization strategies, innovative finance, environmental and social governance (ESG), social impact bonds, blended finance, impact investing and others.

While deciding on providing financing to any social organisation, investors consider many criteria that often keep changing with expectations. Before going forward with any investment, investors have to clearly articulate their priorities and goals.

There are various types of social finance options like bridging loans, venture philanthropy, quasi-equity/revenue participation and social impact bonds. Let us discuss some of these options in more detail –

  • Bridging Loans
bridge finance

Bridge loans are short term loans ranging between 2 to 3 weeks that are borrowed to meet short term financial requirements. These are usually taken for working capital requirements till the funding goes through. They require collateral or security. The loan amount and interest charged depend on the borrower’s repayment capacity. It is also known as ‘swing loan’, ‘interim financing’ or ‘gap financing’. Such loans have greatly helped NGOs and social enterprises through COVID-19 crisis. Since these loans are less risky, the interest rate is typically lower.

Few companies that provide bridge loans to Social Enterprises are –

  1. Big Issue Invest – Big Issue Invest is UK’s first ‘social merchant bank’ by social entrepreneurs. It was founded in 2005. It finances the growth of sustainable social enterprises and offers social enterprises, charities and profit-with-purpose businesses loans and investments from £20,000 to £3 million. Since 2005, they have invested in more than 400 social enterprises across the UK.
  2. CAF Venturesome – It is a charity and bank that helps donors, companies and charities make a bigger impact. CAF offers bridging loans between £25,000 and £250,000 aimed at meeting the needs of small and medium sized charitable organisations.
  3. Social Investment Scotland – SIS is Scotland’s leading provider of affordable, flexible, repayable investment for social enterprises. Their mission is to connect capital with communities for creating a sustainable impact upon people’s lives. 
  • Venture Philanthropy

Venture capitalists sometimes use their resources for philanthropic endeavours. This is called venture philanthropy. Venture philanthropy is the application or redirection of principles of traditional venture capital financing to achieve social welfare. The venture capital firms that offer the capital usually have a lot of experience in those areas.

Venture philanthropists are in a perfect position to inspire and direct change. Capitalists-turned-philanthropists also lend support as an executive coach or board manager to the social enterprise. There is usually a high degree of investor oversight and engagement and also an intimate involvement in operational or managerial aspects of the business. Venture philanthropy is not explicitly focused on profit-making. It is about making investments with an aim to promote some sort of social good.

Few examples of companies involved in venture philanthropy are –

  1. European Venture Philanthropy Association – EVPA was founded in 2004. It is one of the foremost players in Europe and the world in the field of venture philanthropy. Their mission is to achieve maximum societal impact through increased collaboration and know-how in the field of venture philanthropy.
  2. Venture Philanthropy Partners – Focused in Greater Washington Area, Venture Philanthropy Partners are involved in addressing the struggles faced by the youth. They are building strategic investment portfolios and networks of great organizations. They aim to solve the issues plaguing the kids in their communities. Venture Philanthropy Partners takes a high engagement approach with its investees.
  3. LGT Venture Philanthropy – LGT is an independent charitable foundation. It invests in organizations that are directly contributing to the achievement of the Sustainable Development Goals. The organizations they invest in must meet rigorous criteria, including mission-alignment and readiness to scale.
  • Quasi-Equity Debt

Quasi-equity debt are financial vehicles that are a combination of the properties of equity and debt. It is useful for social enterprises that are not-for-profits as they cannot obtain equity capital. It is a form of debt, but with a characteristic of equity investment, its returns are indexed to the enterprise’s financial performance. The terms and conditions of the debt contract are carefully designed to give management incentives to operate the organization.  This form of debt offers banks and other profit-seeking lenders a competitive investment opportunity.

Example of quasi-equity debt providers –

Bridges Social Entrepreneurship Fund- It is one of the many social funds of Bridges Ventures, UK. It has more than £12 million available for investment in social enterprises. It aims to achieve social and environmental benefits as well as financial returns. The fund has around US$ 400 million in assets under management.

  • Social Impact Bonds

Social impact bonds, in simple terms, mean a public-private partnership that funds effective social services through a performance-based contract. They do operate over a fixed period of time but do not offer a fixed rate of return. The repayment to investors depends upon whether the social outcomes have been achieved. The approach is also called pay-for-success in the United States and a social benefit bond in Australia. These bonds are similar to equity investments in terms of the risk involved. Social impact bonds also bring together government, investors and service providers to implement social programs that generate positive outcomes.

These bonds were first launched in UK in the year 2010. Social impact bonds are sold to private investors who get a return only if the public project succeeds. Some of the key benefits of these bonds are – risk transfer to third party investors, innovation opportunities, collaboration across multiple networks and regular performance management. Social impact bonds can be complex and challenging to implement. However, they can also be a game-changer for the stakeholders involved.  

Many social enterprises and NGOs have emerged which are working extremely hard to help out the citizens in such pressing times. Hence, there is a need to educate people about social finance. People should understand the economic, social and environmental trade-offs and how to take advantage of the finance opportunities in the social sector. Only then will the enterprises be able to make the maximum impact in their communities and society as a whole.

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Komal writes about the startup ecosystem on VCBay. She is an Economics Hons. graduate from Miranda House, Delhi University, and is passionate about the world of entrepreneurship and finance.



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