Social enterprises, like any other business--micro or corporation, need capital to grow. It's not only a question of financing, but also of the right kind; capital must correspond to social enterprise financial needs, business cycles, and maturity. Furthermore, like any other business, the best make good use of borrowed capital and their own risk capital.
Access to capital, however, is a constraint social enterprises continue to face. The reasons are fourfold:
- Nonprofit capital markets are immature and underdeveloped, and there is little availability of financial instruments appropriate for capitalizing nonprofit businesses.
- Ownership and regulatory issues bar nonprofits from access to financing--they cannot issue equity or distribute profits.
- Nonprofit managers are financially risk adverse and hence often steer clear of options to leverage or borrow funds in order to capitalize their enterprises.
- For the nonprofit manager willing to borrow, the lack of collateral, credit history, or financial competence are other factors that prohibit access.
Market maturity and limited available resources present significant problems. Agencies such as the Inter-American Development Bank and social investors such as Calvert Foundation or Partners for the Common Good have worked to fill funding gaps with low interest loans and innovative financing programs, such as SEP.
On the other hand, few donors have come to the table to fund start-up or early stage social enterprise with grants. In cases where donors have funded social enterprises, the philanthropic funding cycle is typically slower than the social enterprises' business cycle (production and sales cycle), which can further challenge capitalization.
To exacerbate matters, there is the worrisome misconception that once an organization has launched a social enterprise, it no longer needs grants for social programs, when in fact early capitalization of the enterprise dictates the opposite. There is also the misperception that social enterprises only need loans. Capitalizing a nonprofit social enterprise may take four or five times longer than its private sector counterpart, due to the social costs and encumbrances of supporting dual objectives. These financial limitations hinder efforts of many social enterprises to take their activities beyond the start-up stage and to stabilize, expand, and diversify. 1
Appropriate funding instruments and greater awareness of capitalization issues is needed to facilitate the growth of the social enterprise field as a viable sustainability strategy for nonprofits. Assisting the development of social enterprises' capital markets is a role that onors, philanthropists, and local governments can play. The following exhibit shows the range of funding across the nonprofit and for-profit spectrum. Many of the same funders support both traditional nonprofit and hybrid nonprofit enterprises; however, greater participation and diversity of funding instruments are needed in the latter if this field is to emerge as a mainstay of international development.
|Type of Organization||Traditional Nonprofit||Social Enterprises||Socially Responsible Companies||For-Profit|
|Capital||Grants and donations||Mix of grants and below market capital No interest or low- interest loans||Market rate capital (including social responsible investments)||Market rate capital|
|Sources of Capital and Investors||
|Investment Objective||High social return--no expected financial return||High social return with below market or no financial return||Market rate of financial return and some social return||Full market rate of financial return and no expected social return|
- 1Etchart, Nicole and Lee Davis, Unique and Universal: Lessons from the Emerging Field of Social Enterprise in the Emerging Market Countries, NESsT, 2003.
- 2Adapted from Emerson, Jed and Sheila Bonni, The Blended Value Map: Tracking the Intersects and Opportunities of Economic, Social and Environmental Value Creation, September, 2003, www.hewlett.org