Seb Elsworth: Blended finance programmes are crucial for the future of social enterprise

Recent data sets demonstrate the need for blended grants that will help social enterprises thrive

Two recent publications highlight the demand for finance from social enterprises and how social investors have been meeting that demand over the past five years.

They also demonstrate the need for an ongoing supply of grants in blended finance programmes to ensure this demand can be met in the future. 

Every two years Social Enterprise UK publishes its state of the social enterprise survey. It covers a wide range of topics including the scale of the sector, markets, workforce and the impact of the pandemic. 

As was the case in 2019, headlines suggest that most organisations seeking finance are able to raise most of what they need, although Covid-19 has (of course) affected the picture. 

Only 8 per cent of social enterprises cite obtaining debt or equity as a major barrier. This is down from 18 per cent in 2019. 

It could be that organisations are less keen to take on investment during a period of uncertainty (23 per cent said they had postponed investment).

However, an almost equal number of organisations said that they had increased borrowing during 2020, and 23 per cent had applied for government-backed loan schemes (including the Covid-19 Business Interruption Loan Scheme and Bounce Back Loans). 

In answering more detailed questions about the need for finance, social enterprises were asked to exclude access to government-backed Covid-19 schemes. Overall a third of respondents had applied for external funding or finance, of which the majority (77 per cent) applied for a grant. 

However, 39 per cent applied for a loan, 6 per cent for an overdraft, 8 per cent for equity, 9 per cent for blended finance and 5 per cent for quasi-equity.  

The median amount of repayable finance sought was £50k which is the same as in 2019. This has varied over the last decade: £80k in 2017, £60k in 2015, £58k in 2013, and £100k in 2011.

As for why organisations needed finance, there was an unsurprising increase in those looking to sustain an operation through difficult times.

However, there was also a significant increase in those wanting finance to develop a new service or plans: highlighting the resilience and ambition of the sector during the pandemic. 

In terms of success in raising finance, the median amount raised was £40k. Only 11 per cent of those who applied had failed to raise anything. When asked whether the amount of external finance was sufficient, more agreed than disagreed. 

The report highlights some disparities beneath these headline numbers, both by geography and protected characteristics of those applying – but the overall picture shows a sector largely able to access the finance it needs. 

Big Society Capital also recently published two significant data sets looking at the supply of capital to the sector: updates to its market sizing (estimates of the overall size of social investment) and deal level data (data on individual investments). 

The first headline is the impressive overall scale of the market. £1.2bn was committed to 1,152 charities and social enterprises during 2020. However, these figures cover a wide range of different sorts of transactions, with an average of more than £1m. 

To understand how social investors are making the smaller loans (median £50k) that social enterprises responding to the SEUK survey are asking for, we need to delve deeper into the data, and see the critical role which blended finance is playing. 

The deal level data, for example, shows us the impact that the Growth Fund has had on the supply of social investment over the last five years. 

The Growth Fund mixes grants from the National Lottery Community Fund with debt from Big Society Capital and makes this blend available to social investors to offer smaller scale unsecured loans.

The grant allows the investors to manage the often lengthy and detailed work to support social enterprises in taking on finance, and also allows them to absorb the losses which inevitably come from this sort of lending. 

In some cases a grant is also made available to the borrower (more of this sort of grant was made available in 2020), but not in all. 

From its launch in 2016 up to the end of 2020 the Growth Fund has made £34m of investments, with an average investment size of £66k with a median of £50k.

By comparison, the non-Growth Fund investments in the Deal Level Data during that same five year period had an average investment size of £1.088m and a median size of £250k. 

The presence of the grant in the flow of finance has made all the difference in reducing transaction size to the scale of demand in the SEUK survey. 

The Growth Fund has funded 14 different social investors around the country, but is now nearly fully committed. Ensuring the supply of more grants into these blended programmes is critical to ensuring that the financing needs of charities and social enterprises are met over the long term. 

Seb Elsworth is chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises

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