FINANCE NEWS: Bank urges enterprise financing

Charities, trusts and foundations should be encouraged to provide 'patient capital' to social enterprises to help them start up or expand, according to a special report from the Bank of England.

The Financing of Social Enterprises, based on a survey of 200 organisations, found a demand for long-term finance, where the investor was prepared to accept lower or uncertain returns in exchange for social outputs.

This was especially the case when the social enterprise was just getting off the ground or beginning to grow. Social enterprises are not-for-profit businesses with a socially beneficial purpose such as child care or recycling.

The Bank of England says charities should consider investing in social enterprises "whose activities are in line with their own charitable objectives, either directly or via specialist lenders". Many charities also run their own social enterprises through trading subsidiaries.

There was little evidence, by contrast, of demand for conventional venture capital finance. This was because social enterprises may not be able to generate a sufficiently attractive commercial return, do not want to cede control to outside investors or may not provide an exit strategy for investors.

But the report, which was commissioned as part of the DTI's social enterprise strategy last July, concludes that a large minority of social enterprises believe access to external finance is a major barrier to their expansion, and that charities can help fill the gap.

It follows the publication earlier this month of a Treasury-backed report, The Magic Roundabout, which urges charities to get more involved in programme-related or social investment - lending to achieve both financial and social returns.

The Bank's report suggests that the Social Enterprise Coalition could establish a 'social angels' network to match social investors with social enterprises needing investment, similar to the model of business angel networks for venture capital.

Jonathan Bland, chief executive of the coalition, welcomed the report as a "very well-researched and detailed piece of work".

"A report by the Bank of England sends out strong signals to the Government and the banking sector and we want to discuss with the DTI ways of taking this forward," he said.

"There is a clear need for patient capital if social enterprise is to grow. We want to look into the tasks we have been asked to take on, such as the business angels network."

Among the other measures in the report is a recommendation that the Small Business Service, devolved administrations, and Regional Development Agencies ensure that business support arrangements recognise the special needs of social enterprises. It is suggested that support agencies such as Business Links could outsource work to more specialist bodies.

It also says that the Government and Financial Services Authority should consider exempting social enterprises from regulations around share offerings.

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