Barriers to financing social enterprising
Social enterprises have to overcome up to three different types of barriers in order to secure funding: at the individual, organizational and industry levels
Speaking about social enterprises implies speaking about financing problems. Historically, there has been a significant disconnect between the supply and demand of finance for this type of enterprise and, in recent years, this phenomenon has increased due to the growth in the number of social enterprises and their financing needs.
In periods of economic difficulties or major social challenges (climate change, inequalities, ageing of population, etc.), it is common for an increasing number of people to create companies whose main mission is to generate a positive impact on society and the environment by carrying out sustainable economic activity. The idea that this type of activity is reserved exclusively for foundations and NGOs that receive public subsidies or philanthropic donation is a thing of the past.
How to finance social enterprises
Although in recent years there has been a significant increase in the supply of financing products and services aimed at this type of company, a study carried out by the Seira Foundation shows that most of them continue to finance themselves through traditional banks, instead of using the specific financing tools for their needs that are offered by ethical banking or banking with values, or impact investors, among others. This decoupling of supply and demand for finance leads to an underutilization of resources in the field of social finance.
The study Unmasking the Barriers to Financing Social Enterprises, which we prepared together with Nina Magomedova and published in the scientific journal VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, analyzes the behaviour of managers of social enterprises and financial institutions, to explain the reasons for the decoupling between supply and demand. The study identifies three types of barriers that may be the cause of this phenomenon:
- Individual barriers: These focus on the mutual distrust between business managers and social finance institutions. Business managers consider that professionals from financial institutions do not have sufficient knowledge of the business model of social enterprises. And managers of social finance institutions point to a lack of professionalism in business managers as the main impediment to understanding each other.
- Organizational barriers: These types of barriers arise due to practical or operational inconsistencies between the functioning of the enterprises and the contractual obligations of social finance institutions and investors. These inconsistencies are frequently due to the size of the projects presented by social enterprises, often smaller than required by the financing party. They are also due to the pressure to obtain positive results in order to repay the funding, which, according to the managers of social enterprises, can jeopardize the social mission of their enterprises.
- Sectoral barriers: In this case, the most relevant factor is the lack of maturity of the social business and finance sector. Managers of social enterprises and financial institutions both agree on the lack of metrics to measure and monitor the social impact generated by enterprises. This type of information is key for social finance institutions and investors to be able to report on the social value generated by their investments. Another aspect highlighted by the study is the need to create platforms to put business managers and social finance institutions in contact with each other.
Break down barriers
It seems logical that social enterprises should be able to meet their growing financing needs through the resources available in the social finance sector. To make this possible, alignment between business managers and lenders and investors needs to improve. Some measures that could contribute to this are:
- Training of managers to improve their knowledge and management skills, and of business models with social impact
- Increasing the size of projects with social impact through collaboration between companies and selection of scalable projects
- The development of social impact metrics to measure and monitor the creation of social value by companies