Social enterprise: how to keep going
Social Enterprise Funding and Support Options
Social enterprises are driven by their mission; they exist to pursue an explicit social or environmental goal. In our first blog Social Enterprise: How to boldly get going... in March, we considered the various legal forms social enterprises can adopt to operate their business.
For a social enterprise to succeed, it must also be economically and financially sustainable. In this blog, we consider the funding and support options available to assist social enterprise operations in ensuring sustainability, and consider strategies for growth.
1. Funding for social enterprises
Social enterprises are businesses and, as with all businesses, they want to make a profit. What makes them different from other businesses is what they do with that profit. By reinvesting surplus funds back into their social mission, a social enterprise is able to maintain commercial viability while also furthering its purpose. So profit remains vitally important, and according to the ‘No Going Back - State of Social Enterprise Survey 2021’ report prepared by Social Enterprise UK (SEUK), social enterprises generate, on average, 69% of their revenue from their main source of income.
As we considered in our previous blog, when choosing a legal form for a social enterprise, it is important that appropriate professional advice is obtained about the financial, accounting and tax implications of adopting a particular model, particularly as the social enterprise is likely to remain dependent on the income it generates.
In addition to income derived from providing its services, there are a range of sources of finance available to social enterprises. These include grant funding and debt or equity finance, although some types of funding may only be appropriate for certain legal forms, as we consider here:
The principal financing options are:
- Grants. A social enterprise of any legal form is able to accept a grant from charitable foundations, specialist organisations, and government and EU funds. Charities may tend to find funders more receptive due to the guarantee that all funds will be exclusively applied to their charitable purposes. Community Interest Companies (CICs) may also find more success than straightforward commercial enterprises due to the lock on their assets, whereby any proceeds received from the sale of such assets must be used to further the CIC’s purpose.
- Debt finance. An incorporated legal company can source debt finance, usually in the form of loans from banks or other specialist finance providers. Given the obligation to repay and to accept liability under such loan arrangements, both lenders and borrowers will prefer to enter into these arrangements via a corporate vehicle with limited liability protection.
- Equity finance. This involves a company selling shares in itself to a third party in exchange for funding. Naturally such arrangements are restricted to companies with a share capital and so will not be suitable for companies limited by guarantee. However, it may be possible to secure equity investment in a trading subsidiary wholly owned by a charity or company without share capital.
SEUK provides details of funding sources which are available specifically to assist social enterprises, including:
- ‘School for Social Entrepreneurs’ – this provides learning programmes of support for social entrepreneurs, usually accompanied by a small grant.
- UnLtd - provides a range of grants and support for social entrepreneurs at different stages, even before they have a legal structure or an established organisation.
There are also various trusts and foundations in the UK offering forms of funding. Mostly these organisations support more traditional charities, but an increasing number (including the Big Lottery Fund) will also fund social enterprises.
NatWest Social & Community Capital is an independent charity, supported by NatWest, which provides loans of between £30,000 and £750,000 along with business support to viable social enterprises who make a positive impact on their community, but who are unable to access mainstream funding.
Mutual Ventures is a socially focused consultancy which supports entities on the journey to accessing social investment: from identifying the right social investment offer for the relevant business, to developing a commercial case and becoming investment ready, and brokering relationships with potential investors.
As an approved provider of Big Potential and Access Foundation funds, Mutual Ventures have strong relationships with a range of social investors. As a result, they’ve supported social enterprises to raise finance through ethical loans and social investment, ranging from £200k to £800k.
In addition to a social enterprise mission, commercial entities can also seek B-Corporation certification as a way to propagate and demonstrate their high social and environmental performances. Gaining such a certification can assist in sourcing finance, as investment firms and venture capitalists are more frequently applying the principles of ESG (Environmental and Social Governance factors) to their analysis of growth opportunities which can then impact investment decisions.
In order to achieve B-Corp certification, a company must:
- Demonstrate high social and environmental performance by achieving a ‘B Impact Assessment’ score of 80 or above and passing a risk review;
- Make a legal commitment by changing their corporate governance structure to be accountable to all stakeholders, not just shareholders; and
- Exhibit transparency by allowing information about their performance measured against ‘B Lab’s’ standards to be publicly available on their B Corp profile on the B Lab website.
In undertaking such a thorough certification process, a B-Corp organisation is recognised to have a higher ESG than a business that hasn’t been through such a meticulous review process.
As a firm, we have assisted clients in the legal requirements for seeking B-Corp certification. We will review this process in more detail in our next blog.
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The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.