Challenges, Alternatives and Innovations in Social Enterprises Financing

Abstract

Social enterprises are unique in their business and financial objectives and often in legal structure. They are neither charitable organizations nor mainstream commercial businesses, but embody business objective and legal structure of the former and financial objective of the later. This uniqueness creates challenges of financing operations. These challenges originate from their legal structure, financial objectives adopted and conditions of financial markets. Grant or philanthropic capital, equity and debt are conventional sources of social enterprises financing. In order to overcome the challenges of availing these conventional alternatives, innovations such as high engagement grants, repayable grants, matched grants, no or low interest loans, commercial interest loan with special conditions, high interest loan with patient conditions, loan guarantee, pooling, social impact bonds, quasi-equity, patient equity and social enterprise equity have emerged in last few years. In addition to capital, social enterprises in pivotal stages of growth also require ‘finance-plus’ support – tapping into the expertise and professional network of investors experienced in a particular field. Typically, a direct equity investor assumes the greatest financial risk and also offers the best ‘finance-plus’ support, where as a financial institution offering secured loan as the least engagement as well as the lowest risk from financing a social enterprise. Other modes of financing are placed in the gamut in between the two extremes. Financial need of a social enterprise is also influenced by the stage – start-up, development, growth or maturity - of the life cycle in which the enterprise is.