Social investment is the use of repayable finance to help an organisation achieve a social purpose.
Charities and social enterprises can use repayable finance to help them increase their impact on society, by growing their business, providing working capital for contract delivery, or buying assets.
Social investment is repayable, often with interest. Charities and social enterprises may generate a surplus through trading activities, contracts for delivering public services, grants and donations, or a combination of some or all of these. This surplus is then used to repay investors.
Social investment is not suitable for everyone, and it should be considered alongside other options.
Social investment is not a grant or a donation.
Why you might need it
To kick start your organisation
You’re an entrepreneur with a great idea for a new social venture, or an existing organisation looking to start something new, so you need money to get it off the ground.
Most start-up social enterprises are relatively high-risk investments because new businesses do not have a track record of success. Even if you have some evidence that someone wants to buy the products and services you’re going to sell, there is no way of being sure they’ll buy from you (or that you’ll make a profit) until you start.
For most social start-ups, unlike their private sector equivalents, it is unlikely that your organisation will be able to offer investors a large financial return, even if successful. This means you will need to find investors who are able to accept that there is a larger chance they will not get their money back and a more limited chance they will make a substantial return.
Fortunately, social investors want their money to be used to create social value and those who invest in start-ups are often prepared to accept the ‘high-risk, low return’ reality.
What do you need money for?
At the start-up stage, your main challenge is to get your business to the point where you can find out whether people want to buy your products or services.
Possible uses for investment
- Product or service design and development
- Delivering products and services to customers
- Sales and marketing
- Investment in systems (eg. IT, online, data)
- Staffing – paying yourself and others
How will you pay the money back?
You need to consider both the model for repaying an investment and how repaying an investment will affect your organisation. If you haven’t reached the stage where you’re generating income, it’s not appropriate (and potentially irresponsible) to take on a loan that needs to be repaid immediately. But assuming you can find investment that doesn’t require this, you need to be very clear about how you’ll be able to repay it in the future from your trading activity.
What support/input do you want from investors?
Different types of investors can offer (and want) very different levels of involvement in your social venture. You should ask yourself whether you are looking for an individual or organisation that gets actively involved with developing your business, or one that invests and leaves you to get on with it.
To maintain cash flow
You’re a charity or social enterprise that has been running for a few years, generating positive social impact and revenue, but need a cash injection to deliver a service, finance a contract or cover costs.
What do you need money for?
This would normally be cash flow: your organisation is profitable overall and your income covers costs, but it doesn’t always come in before the bills need to be paid. There are investment products that are designed to help organisations manage these gaps and dips between people paying you and you having to pay bills and other organisations. These are:
Working capital – you might need investment to manage your cash flow so that you have enough money in the bank. This gives you working capital, which is used to finance the everyday operations of your organisation.
Bridging loan – a one-off loan to bridge a bigger gap in cash flow. For example, if payments don’t come in as expected, or there is an unexpected cost that needs to be paid. A standby or overdraft facility can also be used at such times.
How will you pay the money back?
The key question here is whether you are planning to pay the money in one lump sum (having been paid for contract delivery) or to repay the money in stages over time. Or is the facility available to use in a more expected, regular way? This will normally be specific to your organisation’s situation and the type of products, services or contracts involved.
What support/input do you want from investors?
Different types of social investors can offer very different levels of involvement in your social enterprise or charity.
In some cases, specialist social investors may be prepared to make an investment on the condition that they get involved in the business and help you to make it more profitable. You may welcome this kind of help but you may disagree with investors’ ideas about how you should change the business.
To grow and innovate
You’ve decided you want to scale-up so you can:
- Bid for bigger contracts
- Sell your products and services to more people
- Deliver a wider range of products and services
- Deliver your products and services across a wider geographical area
All of which helps you to create more social value and change more people’s lives.
What do you need money for?
It’s important to be clear about how you’re going to scale up or innovate and what resources you need to do it. This could be, for example, to:
- Employ more staff to do more of what you’re doing
- Employ specialists to enable you to bid for new contracts
- Invest in opening in a new location
- Pay for sales and marketing
How will you pay the money back?
If you get an investment that enables you to grow your organisation and it’s already profitable, then should be able to repay an investment on a regular basis with part of your increased income that comes with that growth. You need to think about the risks if growth (and profit) does not happen in line with your predictions.
What support/input do you want from investors?
Some investors are keen to help organisations to scale-up their activities. This can be useful in providing you with the additional skills and expertise needed to take your organisation to the next level. There are also a growing number of support programmes, accelerators, and incubators dedicated to charities and social enterprises looking to scale up. More information on this can be found in other funding options section of types of social investment.
To buy an asset
Charities and social enterprises may be able to improve their long-term financial stability by buying an asset.
An asset is anything your organisation owns that is worth something – usually a building or some equipment that’s vitally important in enabling you to do business. For many organisations, the cost of renting their premises is the second biggest cost after staff salaries. Buying the building where you’re based can be a good way to get some long-term benefit from money otherwise used for rent. You can also potentially rent out space to others, and benefit from any increase in value.
There are downsides: as with personal homes, buildings can also decrease in value and require ongoing maintenance. Also, not all organisations are fit to be social landlords alongside their core business.
In recent years, there has also been growing support for Asset Transfer. This is where a charity or social enterprise takes ownership of a building previously owned by part of the public sector; the building is usually one that is particularly valued by the local community.
What do you need money for?
Examples of what you could use the money for include:
- Buying a building
- Renovating a building to get it to a point where it’s useful
- Buying equipment to help your organisation improve its productivity
Mortgages to buy buildings are one of the most common forms of investment available to charities and social enterprises from both mainstream and social investors. Indeed, secured loans make up a significant proportion of the current social investment market.
How will you pay the money back?
If the asset you’re buying is the building where your organisation is based, then you won’t have to pay rent anymore but you will still need to be clear about how you’re going to afford the cost of repaying the investment – plus any additional costs you’ve taken on as a result of buying the asset. You may be required to make the asset part of the security for the investment, which means that the asset is potentially at risk if you default on your repayments to investors.
What support/input do you want from investors?
Some social investors are particularly focused on helping charities and social enterprises to buy community assets. Are you looking for a social investor that specifically understands the project you’re undertaking or do you just want a mainstream investor who will provide you with investment to let you get on with it?
Key things to consider
Amount required
This will impact the types of product you can take on and the type of investor you should contact. Some finance providers will not consider applications above and below certain amounts. You will also need to consider your ability to repay the investment in the given repayment time.
It's worth visiting Is It Right for Us? to help you work out, first whether social investment could be an option for your organisation, and if so, the types of investment you should consider based on the amount of money you're after.
Revenue model
The critical element around taking on investment is the ability to repay it. Do you deliver activities that generate an income stream that will enable you to repay investors (and create a surplus to contribute towards sustainability)? You may have a range of activities, some of which generate income and a surplus, some could have customers in future, and some parts of your work may have no revenue stream and will always need grants to fund.
A clear income stream from sales of a product or delivery of a contracted service with enough margin to enable you to make repayments is essential. It’s important that you’re clear on your business model, income streams & costs.
Essential steps:
- Identify your customer (this could be a retail consumer, another business or a commissioner)
- Test sales of your product or service
- Understand the size of the market
- Forecast potential future income
Business model and plan
It’s important that you’re clear on your business model, and that potential investors can understand what your business is about from a quick glance at your plan.
You'll need to be able to show your track record of delivery, how well you engage with your community and/or people who use your services, and the level of financial and business skills within the organisation.
You will also need a clear sense of:
- What you do and who your customers are
- The products and services you offer and how profitable they're likely to be
- How many customers you have and who they are
- How you are different from your competitors
- Whether the market for what you do is growing or shrinking, stable or volatile
- How well connected you are to local or national networks and partnerships
Finance providers will judge the risk of investing in your organisation on the market that you operate in and the stability and predictability of your cash flow.
Social impact
As well as being able to effectively demonstrate your organisation's financial resilience and sustainability, you will need to show the social impact you’re delivering through your product or service. This is the key difference between social investors and conventional investors, such as high street banks.
It's important to know:
- Whether you have a clear vision of the impact you’re trying to achieve
- How you manage performance and measure impact
- How you report on your achievements and impacts
Visit the Outcomes Matrix for further guidance on how to measure and report your impact.
Legal structure
Certain legal structures, such as CLGs (Company Limited by Guarantee), prevent organisations issuing shares, which rules out equity investment, while others like CICs (Community Interest Companies) will restrict your rights to dividend (profit) distribution.
You will need to understand what types of investment you will or will not be able to access due to your organisation's legal structure. Visit Is It Right for Us? to work out the best types of investment based on your current legal structure.
Time, resources and people
Taking on investment can be time and resource intensive. If you decide it's right for you, you need to set enough time aside to be prepared to report on and answer questions on your social impact, business model, legal structure and day to day finances.
Investors will want to see how you manage your finances including the systems you have in place, your knowledge of financial procedures, past and predicted cash flow and the extent of your internal financial reporting. If you have good systems and a strong track record, your organisation will be considered a safer investment.
Investors will also want to find out about the skills and expertise of your board members, staff and volunteers. Areas to focus on include finance, marketing, business development and legal.
It's important that your board members understand the opportunities and risks of social investment so they can consider whether it could help deliver your mission.
Enterprise & financial support
The Reach Fund
The Reach Fund is a two-year grant programme that is testing a new model for investment readiness support. The programme is funded by Access – The Foundation for Social Investment and is open to organisations in England.
It enables social investors to refer charities and social enterprises to apply for grants that can pay for the extra support they need to become 'investment ready’.
What they offer
Between £3m and £4m of funding will be available and you can apply for grants of up to £15,000.
If you are referred to the programme your social lender will work with you to identify your needs, develop an investment readiness plan, and apply for a grant. If you are successful in your application, you can use this funding to pay for the support you need to become investment ready. You can then return to your Access Point to hopefully get the investment you need.
Key benefits
- Helps you prepare your organisation for investment through a tailored plan
- Places the social investor at the heart of the process: they will advise you on your investment readiness plan, which may increase the chance of an investment being secured
Points to consider
- The programme is testing a new approach to investment readiness – you can only apply for the fund if you are referred by an ‘Access Point’ social investor
- The programme currently focuses on organisations which have already done some work towards developing a potentially investable business model. If you are at the earliest stages of considering social investment, the Reach Fund may not be for you
Visit the Reach Fund website for more information.
Other support programmes
If you want more general help on getting ready for investment and finding it, you could apply to a support programme such as the School for Social Entrepreneurs’ Match Trading and Scale-Up, UnLtd’s Thrive and Grow it award, or one of the growing number of incubators and accelerators. These programmes offer a package of help over a set period of time.
Borrowing (Debt)
This is when an organisation borrows money and pays it back, usually with interest, over a period of time.
Example: An investor may loan an organisation £10,000; a total of £11,000 is then paid back at £229 per month over four years. The borrower has to demonstrate their ability to pay the money back from their income streams.
When it comes to debt, there are two main kinds of loans that a charity or social enterprise can take on: secured and unsecured.
A secured loan is when the borrower uses a tangible asset such as a building or equipment (called ‘collateral’) so they can acquire a loan.
An unsecured loan involves an organisation taking on an investment that has no ‘collateral’ (is not secured against an asset such as a building or equipment)
Shares (equity)
Equity refers to an investment in exchange for shares in an organisation.
So this will only be possible when the organisation has a legal structure that has shares. This can include:
- Co-operatives or Community Benefit Societies
- Registered Societies (previously called an IPS Industrial Provident Society)
- Community Interest Companies limited by shares.
Community shares are also a type of equity investment. Investors get a share of the organisation.
An investment that works like a mortgage on a house. An investor provides your organisation with a loan against an asset (often a building or equipment) as ‘collateral’. Alternatively, an organisation's parent company may offer its shares in the organisation as the collateral. You repay the loan on an agreed basis (e.g. regular monthly payments) usually with interest on top.
A tradable loan from a group of social investors to a charity or social enterprise over a fixed period of time with a fixed rate of interest. For example, if you issued a £2million bond over 5 years at 2% interest in 2017, you would pay the social investors £40,000 interest each year and repay the £2million in 2022.
A package of funding that is a mixture of investment, that needs to be repaid and a grant that doesn’t need to be repaid. For example, a grant of £20,000 alongside a loan of £50,000 that needs to be repaid over 5 years with 10% interest.
An investment that is not secured against an asset (a building or equipment). An investor provides your organisation with a loan and you repay it on an agreed basis, usually with an agreed amount of interest on top.
An organisation
This is most likely to be from one of the following:
- Specialist social investment firms
- Social banks
- Trusts & foundations
Social investors will often have a particular focus market sector such as education, or in a specific geography, while some work with organisations at a particular stage of development. They may also only provide a certain type of social investment. Investors will often hold multiple funds, some of which have sub-funds.
Each organisation will have different eligibility criteria. It's important you know the basics first and are confident that social investment is right for your organisation before contacting any providers.
An individual
Taking on investment from an individual or group of individuals. This includes:
Angel investment: You can find social investment focused angels on Angel CoFund or mainstream angels through UK Business Angels Association.
Crowdfunding: There are a number of peer-to-peer lending and crowdfunding platforms that you could use. Three platforms that focus on social investment opportunities for charities and social enterprises are Crowdfunder, Ethex and Community Chest.
Community shares: If your legal structure allows it, the Community Shares Unit & Community Shares Scotland offer guidance on how to set up a community share offer.
The cost of capital is the cost associated with taking on a new investment.
To understand more about the cost of capital in social investment and what key factors you need to consider, watch the video explainer below.
You can also check out our Cost of Capital Calculator to see how the interest rate, loan duration and fees can affect the total cost of investment.
What is capital?
Capital usually refers to financial capital or money, in particular, the amount of cash and assets held by an organisation (for more definitions, explore our Jargon Buster).
The cost of capital is the cost associated with taking on a new investment. In this case, when charities and social enterprises take on repayable finance (social investment).
What is the cost of capital?
When an organisation receives social investment, they will usually need to pay a return for using the money an investor lends them.
Any social investor making loans expects to lend, and then be repaid. The aim is to cover the cost of lending and any default payments which means the money can be recycled and lent again.
How much does social investment cost?
Different investors will have different appetites for loss and return, and this will determine how much capital is available and what it will cost.
The cost of capital is often simplified to the interest rate that you will be charged.