Why should you consider social investment? What are the advantages? And what is ‘traditional’ investment? In this blog, I’ll be exploring all these questions and more, sharing insights from my first four months of navigating the world of social investment, a challenging but rewarding journey.
...but wait…What is social investment?
To understand its advantages, we need to understand its meaning. Social investment is usually defined as the use of repayable finance, often with interest, to help an organisation achieve a social or environmental purpose.
Charities and social enterprises can use repayable finance to help them increase their social impact, for example by growing their business, providing working capital for contract delivery, or buying assets such as a new building to increase their capacity.
The Handcrafted Projects case study is the perfect example to show what social investment in action can look like. They received investment from social investor, Key Fund, with the objective to help the organisation address a pressing need for more social housing and support for vulnerable individuals.
Before the investment, they had four hubs connected to around 20 houses each. After the investment, they were able to purchase two new buildings, facilitating the launch of a fifth hub. By increasing their capacity, they were also able to increase their impact as they can now welcome more people in need of housing into their facilities.
…and traditional investment?
In this blog, traditional investment, or a "traditional investor," refers to an individual or organisation, such as high street banks, that primarily invests in for-profit businesses. The main goal of these investors is to generate profit or achieve a significant financial return on their investment.
A real-world example of this type of investment would be a high street bank like NatWest or HSBC providing a business loan to a charity or social enterprise. This does sometimes happen and can be a good option but many investors may consider these models too risky because of lack of understanding of how income is generated.
Three advantages of social investment
1. Partnerships that align with your values
Social investors focus on helping you to tackle specific social issues, such as domestic violence, homelessness or energy crisis. This means that they often look to invest in an organisation that aligns with their values, which is why finding the perfect match is essential. Luckily, the investor directory tool is available to everyone who is looking for a social investor with shared values or local to them. Social investors aim to create positive change with the potential of generating financial returns.
Not only are they more invested in seeing how their money help people’s lives but they are also open to hearing new ideas from social enterprises or charities. To learn more about the importance of having an open an honest relationship with your social investor and what this looks like in practice, check out the Blackburne House case study, which includes a video featuring both the investee and investor perspective on this.
2. Non-Financial Support:
An extra benefit that comes along with the social investor’s genuine interest in creating positive impact is that they will become long-term partners to the organisation, not just money providers. In practice, this means that any problems encountered or unexpected situations that the social enterprise or charity finds along the way, they can always pick up the phone to their social investor and benefit from their network to help find solutions.
An example of this is shown in the Home Kitchen case study. Just a few weeks before their grand opening of their restaurant in Primrose Hill, the building was compromised by squatters. Since their restaurant aimed to help end homelessness, they found themselves in a quite tricky situation. Fortunately, they were able to call their social investor, Big Issue Invest, who had an expansive network in the sector and resolved the issue without further complications.
“We prefer knowing that the investment is coming from an organisation with the same goals and values as us, it means we’re dealing with people who understand the social impact and not just the financial side. Because of the stage we were at when we applied for investment, some of the input we got from the Big Issue Investment team has been really valuable and will help make Home Kitchen stronger as a business. Ultimately, that translates into us being better able to support our employees and achieve our impact goals.”
Michael Brown, Co-founder, Home Kitchen
3. Patient Capital:
Social investors may be able to offer extended loan durations compared to high street banks, allowing investees to focus on long-term impact. This can also affect the affordability of the loan in a similar way to the interest rate you’re being offered.
For example, borrowing £20,000 over 5 years with 5% interest would cost around £22,645.48 in total, with monthly repayments of £377.42. Borrowing the same amount, with the same interest rate but over 10 years, would mean a higher total cost of £25,455.72, but much lower monthly repayments of £212.13. Top tip, you can check out our handy Cost of Capital Calculator to provide an estimate for both total and monthly costs of social investment.
One type of social investment that is typically included under the umbrella of patient capital is quasi equity - a product that aims to fill the gap between debt & equity, it's a patient repayment process which is based on trading performance.
To understand how they are able to offer longer loan terms, we need to look at where the money has come from. If the capital provided to the social enterprise or charity was given by a trust or foundation, the investors could be in less of a hurry to get the money back and may be able to provide longer terms.
However, if the money comes from a specialist social investment firm that themselves borrow money from a wholesaler (like Better Society Capital or ACCESS), then they will need to return the capital with interest to their own investors, and this could impact on the loan terms they may be able to offer.
Hear directly from Andrew Lamond from The Energy Training Academy, a Scottish-based social enterprise that secured quasi-equity via Firstport last year...
Conclusion
After reviewing the main advantages of social investment, we can appreciate how it differs from traditional investment. Social investment supports impact-driven growth, focusing on the social outcomes and the potential for creating positive impact, while traditional investment prioritises financial gains.
For a social enterprise or charity that meets the criteria to take on social investment, which you can check in less than 2 minutes via the Is it right for us tool, it could be a powerful financial aid to utilise if you have plans to increase your impact even further.
Unlike traditional investments, social investment prioritises funding initiatives that deliver measurable social or environmental impact. This approach not only enables organisations to secure the resources needed for growth but also helps them remain true to their core values and mission.
Lastly, I would like to add that when considering funding options, it is essential for investees to carefully assess which type of investment aligns best with their goals and growth strategy. For organisations with a strong social focus, social investment may provide the ideal balance between funding and mission-driven outcomes. On the other hand, other ways of raising capital might work best for your structure or business model.
Ultimately, the choice should reflect your organisation’s priorities, whether that means maximising impact, achieving financial sustainability, or striking a balance between the two.
Make sure to share your own advantages or disadvantages on our social media channels!
Maria Lozada is a Digital Marketing Apprentice at Good Finance. She focuses on our digital marketing channels and creative content. If you have an idea for a blog or an example of social investment you’d like to spotlight on Good Finance, please email: mlozada@bettersocietycapital.com