Social enterprise lending
Encyclopedia
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. The practice exists to recognise that projects with social outcomes often reach profitability later than commercial projects. Softening the terms of a loan
means that a social lender would 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.
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 spill over began in the US, most notably on the west coast and eventually spread to the UK and Europe
.
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
.
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.
, Charity Bank
, Unity Trust Bank
and Futurebuilders England
. All four 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. The first three institutions offer full service banking while Futurebuilders is solely an investor. All aim to serve organisations that cannot access traditional lending from commercial banks and each assume a majority of customers will be first time borrowers.
Futurebuilders England
is a £418 million government-backed loan fund which offers a combination of loans, grants and professional support primarily for those organisations who want to generate income through forming contracts with public sector agencies such as Local Authorities and Primary Care Trusts. Futurebuilders is interested in improving both the financial and strategic capability of the third sector and has particular interest in investing in those who serve disadvantaged communities.
Futurebuilders manages four funds: The Department of Health’s Social Enterprise Investment Fund
(SEIF), The Modernisation Fund, from the Cabinet Office
, The Communitybuilders
Fund , on behalf of the Department of Communities and Local Government and the Office of the Third Sector and the Futurebuilders England Fund.
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 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 thinks 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.
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.
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.
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.
Social finance
Social finance is an approach to managing money that delivers a social dividend and an economic return.Social finance includes community investing, microlending, social impact bonds, and sustainable business and social enterprise lending...
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. The practice exists to recognise that projects with social outcomes often reach profitability later than commercial projects. Softening the terms of a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
means that a social lender would offer provisions such as longer loan terms, lower interest rates and repayment ‘holidays’ where capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
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.
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 ever 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 servicesPublic services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...
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 spill over began in the US, most notably on the west coast and eventually spread to the UK and Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
.
Social lending and venture philanthropy
Venture philanthropy
Venture philanthropy, also known as philanthrocapitalism, takes concepts and techniques from venture capital finance and high technology business management and applies them to achieving philanthropic goals.Venture philanthropy is characterized by:...
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 capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
.
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 BankTriodos Bank
Triodos Bank N.V. is a bank based in the Netherlands with branches in Belgium, Germany, United Kingdom and Spain. It is a pioneer in ethical banking. Triodos Bank finances companies which it thinks add cultural value and benefit both people and the environment...
, Charity Bank
Charity Bank
Charity Bank is bank and a charity based in the United Kingdom, with offices in Tonbridge, London and York.Charity Bank is a not-for-profit bank that only makes loans to charities and social enterprises....
, Unity Trust Bank
Unity Trust Bank
Unity Trust Bank Plc provides specialist banking services to trades unions and charities in the United Kingdom. Founded in 1984; head office is located at Nine Brindleyplace in Birmingham....
and Futurebuilders England
Futurebuilders England
Futurebuilders England is the largest social investor in the UK. Its registered office is 6 St Andrew Street, London EC4A 3EA, with a second office in Newcastle...
. All four 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. The first three institutions offer full service banking while Futurebuilders is solely an investor. All aim to serve organisations that cannot access traditional lending from commercial banks and each assume a majority of customers will be first time borrowers.
Futurebuilders England
Futurebuilders England
Futurebuilders England is the largest social investor in the UK. Its registered office is 6 St Andrew Street, London EC4A 3EA, with a second office in Newcastle...
is a £418 million government-backed loan fund which offers a combination of loans, grants and professional support primarily for those organisations who want to generate income through forming contracts with public sector agencies such as Local Authorities and Primary Care Trusts. Futurebuilders is interested in improving both the financial and strategic capability of the third sector and has particular interest in investing in those who serve disadvantaged communities.
Futurebuilders manages four funds: The Department of Health’s Social Enterprise Investment Fund
Social Enterprise Investment Fund
The Social Enterprise Investment Fund is a Department of Health fund which provides investment to assist social enterprises delivering health and social care services...
(SEIF), The Modernisation Fund, from the Cabinet Office
Cabinet Office
The Cabinet Office is a department of the Government of the United Kingdom responsible for supporting the Prime Minister and Cabinet of the United Kingdom....
, The Communitybuilders
Communitybuilders
Communitybuilders is a £70 million programme that aims to strengthen the resilience of multi-purpose, inclusive community-led organisations that operate at the neighbourhood level .- Background :...
Fund , on behalf of the Department of Communities and Local Government and the Office of the Third Sector and the Futurebuilders England Fund.
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 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 thinks 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.
Charity Bank
Charity Bank
Charity Bank is bank and a charity based in the United Kingdom, with offices in Tonbridge, London and York.Charity Bank is a not-for-profit bank that only makes loans to charities and social enterprises....
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.
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.
Other social lenders in Britain include Adventure Capital Fund, Venturesome (an initiative of the Charities Aid Foundation
Charities Aid Foundation
The Charities Aid Foundation is a registered UK charity. Its Head Office is located in the King's Hill business park, West Malling, Kent with a second office in London on St Andrew Street, EC4A 3AY...
), London Rebuilding Society, The Social Enterprise Investment Fund
Social Enterprise Investment Fund
The Social Enterprise Investment Fund is a Department of Health fund which provides investment to assist social enterprises delivering health and social care services...
(formally Local Investment Fund), Community Development Finance Association, Cooperative and Community Finance, Bridges Community Ventures and The Capital Fund.
See also
- Social financeSocial financeSocial finance is an approach to managing money that delivers a social dividend and an economic return.Social finance includes community investing, microlending, social impact bonds, and sustainable business and social enterprise lending...
- Ethical bankingEthical bankingAn ethical bank, also known as a social, alternative, civic, or sustainable bank, is a bank concerned with the social and environmental impacts of its investments and loans. Ethical banks are part of a larger societal movement toward more social and environmental responsibility in the financial...
- Social Return on InvestmentSocial Return on InvestmentSocial Return on Investment is a principles-based method for measuring extra-financial value relative to resources invested...
- Socially-responsible investing)
- Social fundSocial fundA social fund is an institution, typically in a developing country, that provides financing for small-scale public investments targeted at meeting the needs of poor and vulnerable communities...
- Charity BankCharity BankCharity Bank is bank and a charity based in the United Kingdom, with offices in Tonbridge, London and York.Charity Bank is a not-for-profit bank that only makes loans to charities and social enterprises....