What are the challenges for social enterprises when raising finance?
Is it really harder to raise money to start a social enterprise?
There are several preconceptions surrounding the issue of funding for social enterprise. Social enterprises often report difficulties in accessing traditional business funding routes, and statistics show they are more likely to be dependent on grant finance and less on commercial finance.
However, a 2007 report on finance for social enterprise by Warwick Business School, found there is actually little difference in success rates for obtaining commercial finance between social enterprises and traditional for-profit ventures.
There are also no significant differences in loan margins according to the report, and social enterprises require relatively less collateral than ordinary businesses.
However, despite suggestions that it’s no harder to obtain commercial funding, social entrepreneurs are less likely to seek commercial finance and instead currently tend to rely on grant funding.
Only 65% of social enterprises use commercial funding compared to just under 80% of normal for-profit businesses. On the flip side, 71% of social enterprises use grants compared to a mere 6% of mainstream businesses.
So why is there such a big gap between the number of social enterprises and normal businesses that use traditional business funding routes? Perhaps it’s a misguided assumption on the part of social entrepreneurs that they won’t be able to secure investment. Or maybe it’s just a lack of awareness about the different funding routes available.
As the number of social enterprises grow, and their credibility as viable profit-making ventures gains strength, this funding gap will hopefully recede.