Financing social enterprises and the demand for social investment

• DOI: http://doi.org/10.1002/jsc.2245
• Published date: 01 January 2019
• Date: 01 January 2019

RESEARCH ARTICLE

Financing social enterprises and the demand for social

investment

*

Fergus Lyon | Robyn Owen

Centre for Enterprise and Economic

Development Research (CEEDR), Middlesex

University Business School, London, United

Kingdom

Correspondence

Robyn Owen, Centre for Enterprise and

Economic Development Research (CEEDR),

Middlesex University Business School, London

NW4 4BT, United Kingdom

Email: robynowen63@gmail.com

Abstract

Social investors are supplying increasing amounts of finance to enterprises combining social and

commercial objectives although these social enterprises are still more likely to seek bank

finance, suggesting that social investors should focus on market gaps which are more likely to

occur for smaller, younger social enterprises that lack track record and collateral. Social enter-

prises offer innovative ways of combining social and commercial objectives and are only slightly

less likely to seek repayable finance than other small and medium-sized enterprises (SMEs), with

younger social enterprises being more growth oriented and also more discouraged from borrow-

ing. Where social enterprise borrowing takes place, it is almost three times more likely to be

from commercial banks, rather than specialist social investment lenders that are more likely to

invest without requiring collateral. Social investment lenders should therefore focus their offer

on finance gaps left by banks, notably in earlier stage social enterprise development, rather than

compete for existing commercial bank market share.

1|INTRODUCTION

Social enterprises, operating at the interface of the non-profit sector

and the commercial world, face particular challenges in accessing

repayable finance as they are less likely to have the collateral of indi-

vidual entrepreneurs and can appear less attractive to lenders and

investors as they have to balance their social mission with commercial

objectives (Doherty, Haugh, & Lyon, 2014; Vickers, Andrea, Roger,

Brennan, & Syrett, 2017). This has been used as a justification for a

wide range of social investment loan finance initiatives for these inno-

vative “hybrid,”social enterprises that are wanting to scale up but may

lack the security required by conventional lenders (Castellas, Ormis-

ton, & Findlay, 2018; Nicholls, 2010). However, little is known about

the actual demand for repayable finance by these social enterprises,

and how social investment can fill a finance gap left by conventional

lenders.

The supply of specific investment for social enterprise is expand-

ing with specialist social investment programmes around the world

(Rizzi, Pellegrini, & Battaglia, 2018; Vickers, Lyon, Sepulveda, &

McMullin, 2017). These funds are financed by investors that seek

opportunities to lend to organizations that create social value at the

same time as generating a financial return (Nicholls, 2010) and range

from financing programmes that offer subsidized loans for organiza-

tions with social values to forms of philanthropic venture capital.

Much existing analysis of the social investment sector has

focused on the nature of the supply with less attention to which types

of organizations want and can afford debt finance. This paper there-

fore poses three research questions: which social enterprises are using

repayable finance? What are the sources of investment sought? And

which social enterprises are using specialist social investment?

These questions are examined by taking the case of innovative

hybrid organizations in the UK. In the UKthere are a range of different

social investors with added support from the wholesale provider of

finance, Big SocietyCapital. The UK government has promoteditself as

the internationalleader in this field particularly following its chairing of

the G8 in 2014 (Big Society Capital, 2014). Analysis commissioned by

Big Society Capitalsuggested a growing demand, centered on expecta-

tions of a growing role of social enterprises in public service delivery,

changes in commissioning and the ability of social enterprises to

develop sustainable business models(BCG, 2013).

Existing analysis of demand for investment does not distinguish

between demand from mainstream lenders (i.e., Mainstream “High

Street”banks) and demand from social investment finance intermedi-

aries. There are further unanswered questions on the roles of com-

mercial banks and social investors with regard to lending to social

enterprise without collateral.

*JEL classification codes: G21, G23, G24, G28, L26, L53

DOI: 10.1002/jsc.2245

Strategic Change. 2019;28:47–57. wileyonlinelibrary.com/journal/jsc © 2019 John Wiley & Sons, Ltd. 47