How to: Raise capital for a start-up social enterprise

Some tips on how to match high ideals with high finance.

The UK's 55,000 social enterprises make up 5% of the national business base. However, as Uday Thakkar from consultants Red Ochre, puts it, "there are lots of barriers between those with money and those who need money". Here is some advice on how to hurdle them.

1. Think hard about your company’s legal set-up
Setting up as a CIC is the obvious route for a new social enterprise wanting to brand itself as such. However, although CICs are allowed to issue shares, the dividends they can pay are subject to statutory limitation. This fact is likely to put off many potential investors – particularly as social enterprises are typically high-risk investments. Nigel Kershaw, Big Issue founder and CEO of BIGinvest, thinks this is so much of a problem that start-up social enterprises should seriously consider setting up as traditional companies.

“There are any number of traditional companies trading with a social echo,” he says. “I certainly wouldn’t be prissy about being a CIC.”

2. Find your level
A downside of being a traditional company is that they are ineligible for the grants intended for social enterprises. According to Thakkar, such grants will always be the most appropriate form of income for the myriad “quasi-charities” which make up 85 per cent of the sector, never dealing directly with other businesses or customers.

For other companies, grants can be a good way to get started and build up the expertise and track record necessary to apply for commercial contracts to run local services. HCT Group is a good example of a company that took that route.

Nor are grants necessarily restricted to small amounts. Thakkar cites the case of a London charity that was recently awarded £13m by the Big Lottery Fund to franchise out its scheme for recycling old office furniture into IT furniture.

However, for many such “scaleable” social enterprises - those with the potential for rapid and widespread expansion – grants do not, typically, offer enough capital for them to fulfil their potential.

3. Be prepared for blanks stares from bank managers
An obvious alternative source of finance is loans, but don’t expect your local high street bank manager to throw open his vaults. “Some banks say they are ready to help social enterprises, but the message is not getting through at branch level,” says Thakkar. “When I said I wanted to start a social enterprise, they didn’t know what it was. When I explained it was a not-for-profit company they said they wouldn’t even give me a bank account.”

Specialist banks such as Charity Bank and Triodos are obvious alternative sources of loans – although, according to Kershaw, these are geared towards companies with obviously charitable purposes. In addition, their rates often compare unfavourably with those of the high street banks.

Loans are also available for social enterprises from Kershaw’s own BIGinvest and, for those wanting to bid for contracts with central or local government, from Futurebuilders, but these are only realistic options for established businesses.

4. Speak to your local CDFI
Community Development Finance Institutions can offer limited financial advice, as well as small-scale loans. However, don’t expect them to come to you; according to Thakkar, CDFIs don’t have the resources to seek out finance-ready enterprises to nurture. “In 10 years they have only spent £3m”, he points out. In addition, their interest rates can be up to 20 per cent on account of the high risks they take with their investments.

5. Think about seeking venture capital
With a number of ethical investors on the look-out for companies which offer a social as well as a financial return, venture capitalists such as Bridges Community Ventures are adapting their traditional operating practices to take account of social entrepreneurs’ frequent unwillingness to be bought out and sold on to the highest bidder in a few years.

‘Equity-like capital’ – available to CICs as well as traditional companies - operates like a loan whose repayment rate varies – like a virtual share price - according to how well the company is doing. The venture capitalists sit on the boards of the companies they invest in and offer the kind of long-term financial advice which social enterprises typically struggle to access. However, ownership of the company remains with its original investors.

According to Thakkar, this is the ideal arrangement for scaleable social enterprises. However, it can be a hard one to come by: Bridges’ executive director, Michele Giddens, admits that her company only invests in one per cent of the business plans it sees.

“You already need a track record for them to give you money,” laments Thakkar. “It’s like the old saying: they’ll only lend you an umbrella when it’s not raining.”

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