What is social investment?

Social investment, like social enterprise, has a double bottom-line. It combines financial with social objectives and targets.

Social investment is a form of socially responsible investment. This is an umbrella term used to describe any form of investment that combines investors' financial objectives with their commitment to social concerns such as social justice, economic development, peace or a healthy environment.

Social investment typically uses non-conventional investment vehicles and seeks to make investment available to individuals or communities unable to access loans and other financial services from mainstream banks.

Social investment for the voluntary and community sector

Banks can be reluctant to lend money to organisations that lack the assets or security needed to secure a loan. Many finance initiatives for the sector aim to fill this gap by providing a range of financial products akin to those currently available to support private business.

Funders are also interested in exploring loans as a way of supporting organisations since this can be a way of stretching funds further. Making a loan rather than a grant means that funds become available again later down the line to support additional organisations.

How can social investment be useful?

Amongst other benefits social investment can

  • Provide the injection of cash that makes things happen now
  • Encourage thinking beyond the short-term psychology promoted by time-limited grant funding
  • Promote business planning
  • In some cases, offer more favourable terms than traditional high street banks
  • Bridge the gap between delivering services under contract and payment by the commissioner
  • Be money to use as you choose.

Is social investment an appropriate option for what we want to do?

As organisations develop alternative income streams, such as contractual income through service delivery or earned income through trading goods and services, they may also need substantial investment to build the services they wish to provide.

Where investment is needed to help drive organisations forward , as in purchasing a building, providing new equipment, or starting a social enterprise, social investment may well be an appropriate option.

Social investment also has a place in helping organisations to manage cash flow or even cover ongoing running costs.

Do we have the right skills to manage social investment?

You need to have strong planning, financial and cash management skills. Staff and trustees need to support the idea of social investment by understanding why it is being used and how it will benefit the organisation and its beneficiaries.

Some providers will give support to help organisations work through the finance need and develop skills to manage loans. This can include advisers discussing requirements, provision of loan calculators or providing grants for development.

You will need to ensure that your governing document gives you the power to borrow and potentially, to pledge assets as security.

Are there specialist voluntary and community social investors?

Banks can be reluctant to lend money to organisations that lack the assets or security needed to secure a loan. Many loan finance initiatives for voluntary and community organisations aim to fill this gap by providing a range of financial products akin to those currently available to support private business.

Funders are also interested in exploring loans as a way of supporting organisations since this can be a way of stretching funds further. Making a loan rather than a grant means that funds become available again later down the line to support additional organisations.

Many voluntary and community organisations are new to loan finance so many providers also provide support to help organisations work through the finance they need and to develop the financial management necessary to manage a loan.

What are the potential risks?

When agreeing to any form of social investment trustees are legally binding the organisation to an agreed repayment schedule; terms and conditions; and possibly, security in the form of a charge on the organisation’s assets. Trustees must understand the terms and conditions associated with a loan. Non-compliance can result in demands for immediate repayment.

When trustees act prudently, they are not held personally liable for the loan. However, they should be aware that ultimately the lender may have a charge on the organisation’s assets and require them to be disposed of to make repayments due.

Provide good project management, abide by the terms and conditions, and always communicate clearly with the lender. Remember, if a provider is willing to finance an organisation’s project, they believe it will work. Providers work to understand an organisation’s needs and undertake due diligence before agreeing to any loan.

Understanding the options in social investment

Whether your organisation needs money to temporarily cover cash flow, fund a project or innovate with new services there are types of social investment that could work for you. Your legal structure will impact on the types of investment you can access.

Social investment can broadly be separated into three types: debt finance, equity finance and quasi-equity finance.

Debt finance

A fixed sum of money is borrowed for an amount of time with an agreed level of interest. All of the money is paid back plus interest and/ or charges.

Equity finance

Money is permanently invested in an organisation with shares issued to an investor in exchange for capital. There is no legal obligation to repay the amount invested or to pay interest. The legal structure of many voluntary and community organisations means that equity finance is not currently widely used in the sector.

Quasi-equity finance

Money is permanently invested in the organisation with no fixed amount of interest. This kind of arrangement is often capped, time limited and with 0% return if there is no future revenue.

Debt finance

Secured loan

A loan is given against the security of an asset, such as property or equipment. If the organisation fails to repay the loan then the lender can take possession of the asset. As the lender is guaranteed not to lose anything with a secured loan the interest rates are often lower than other types of loan.

Stand by/ underwriting facility

A lender will commit to provide funding for a specific project and for a set period of time if other funds don't materialise. Interest will only be paid if the loan is drawn down.

Overdraft

An overdraft is activated when an organisation's bank balance reaches zero. If the overdraft is agreed in advance then there will be a set rate of interest. If the overdraft is not authorised then there is likely to be higher interest rates and charges.

Bridging loan

A bridging loan can be used to temporarily cover financial costs brought about by the mismatch in delivery of work/ services and the payment of contracts or grants. A bridging loan is repaid when the payment is received by the organisation. Interest rates tend to be low because the lender is guaranteed to get their money back.

Pre-funding with fundraising

When fundraising for a specific project, the last bit is often the most difficult. With a pre-funding loan organisations can start work, taking advantage of low-cost building terms. The loan will be repaid when the fundraising is complete.

Patient capital

This type of loan typically has low (or no) rates of interest and will be made over a long period of time. Funders of this kind will often forgo returns on their investment in exchange for high social and/ or environmental impact.

Growth/ development capital

This is investment that can help organisations to grow, perhaps to develop new services or products. Growth capital can be a mixture of loans that will be repaid and equity that will repay on future income.  

Equity finance

Community investment

An organisation can sell shares in their enterprise to members of the community in return for their investment. The return on this type of investment will be minimal, just enough to encourage people to invest.

Venture philanthropy

This type of investment can be thought of as investment-plus. A philanthropy specialist will provide investment to an organisation (could also be a loan) along with some form of management support.

Equity investment

Here if an organisation's governing document allows, they can sell shares to individuals or institutions. Investors will be paid dividends at an agreed rate.

Social impact

These are a form of outcomes based contract between the public and private sectors. A private sector organisation involved in a social impact bond will partner with – and fund – a voluntary and community organisation – to achieve the desired outcome.

Charitable bonds

Organisations can raise money for projects or development by issuing bonds. These are a form of long-term debt that must be backed up with the ability to repay the bonds plus any interest at an agreed time. Repayment of bonds may also take the form of goods or services from the organisation.

Quasi-equity finance

Quasi-equity/ revenue participation

If the issuing of shares is against an organisation's legal structure then quasi-equity could be an option. Unlike a loan, this investment is dependent on the financial performance of the organisation. If future expected financial performance is not achieved, a lower or possibly zero financial return is paid to the investor. If performance is better than expected, then a higher financial return may be payable. This kind of arrangement is often capped and time limited. Quasi-equity provides a more equal sharing of risk and reward between investor and investee.

Philanthropic capital

A broad range of financial arrangements which have no expectation of a financial return. This type of investment is often used as a financial guarantee for funds and as a way to encourage other investors. Philanthropic capital allows organisations to develop high risk, but potentially high impact, products and services.

Picking the right social investment for your needs

The types of social investment that your organisation chooses to investigate will depend on many factors.

Some forms of social investment lend themselves to different organisational needs; from managing cash flow to building a community hall, from developing a new service to covering ongoing staff costs.

Your organisation's legal structure will also play a part in deciding what social investment you can access. For many voluntary and community organisations equity won't be an option as it will be against their governing document.

Here's rough a rough guide to which types of social investment suit different needs. This is not a definitive list and other types of social investment might still work for your project.

Working capital

Organisations sometimes need to raise funds to cover their every day staff and operation costs. The following types of social investment might be appropriate:

  • Secured loan
  • Equity investment
  • Charitable bonds.

Specific projects

If you need to raise money for a specific project then these types of social investment might be worth investigating:

  • Secured loan
  • Community investment
  • Equity investment
  • Social impact bonds
  • Charitable bonds.

Manage cash flow fluctuations

You may find that there's a mismatch between the delivery of goods and services and the payment of grants or contracts. There are types of social investment that can help to temporarily cover cash flow:

  • Secured loan
  • Standby loan
  • Overdraft
  • Bridging loan
  • Pre-funding of fundraising

Growth

Growing your organisation, such as innovating with new ways to deliver your service, can be high risk but can also be high impact if successful. The following types of social investment are more appropriate for this kind of activity:

  • Secured loan
  • Patient capital
  • Growth/ development capital
  • Venture philanthropy
  • Equity investment
  • Charitable bonds
  • Quasi-equity/ revenue participation
  • Philanthropic capital.