By Jane Arnott, General Manager, Consulting and Business Services
At the recent Third Sector Expo, one of the speakers asked for a show of hands to demonstrate people’s level of understanding of social finance. Given that the delegates were all sector professionals, I’m not sure whether I should be surprised or not at their self-professed limited understanding of this space.
Social finance is the investment of funds to generate a social impact and a financial return. It’s the umbrella term for a range of approaches and models that have been developed in recent years as an alternative to traditional gift-based funding, where the intention is only to have a positive social impact. Paying back the original investment is the minimum, with varying levels of further return depending on the model and the investor. I think the gaps in knowledge in this space can be attributed to a number of factors:
- Language and jargon: the social finance sector is full of terms that have been appropriated (and in some cases adapted) from the finance sector, plus some new creations. We don’t necessarily use the same terms with consistent meaning across the traditional finance and the new social finance sectors, conversely, we can also use different language to mean the same thing, especially when crossing national boundaries. No wonder we’re confused…
- New models: As the social finance sector develops, so the models of funding that fall under this umbrella have grown. Many of them are borrowed and adapted from the finance sector and the principles of lending and equity purchase are fairly straightforward to get our heads around. Others are based on more complex platforms or are genuine innovations – pilot approaches that may prove to be revolutionary, or fatally flawed.
As not for profits increasingly move to social enterprise and fee for service models, the opportunities for social finance will grow. Not for profits moving into this space need to be ‘investment ready’ and this requires more than a great idea. Sadly, I’ve seen a number of organisations disappointed because they don’t even have the basics in place, so below I’ve listed three key questions you should consider before going down the social finance track:
Do you have a viable business model with customers who will pay for your service?
Some not for profits see social finance as a rescue remedy to cuts in grant funding, but if you don’t have a customer who will pay for your service, you are not going to generate the return to pay back the initial investment. Social finance is a particularly strong option where you have an established and viable social enterprise but lack the capital to grow, and some investors will consider completely new work. In all cases, you’ll need a strong business plan that demonstrates that people will buy your services and you can pay back the investment.
Do you have the right skills and approach on your board and leadership team?
Your board and leadership need to understand the social finance model you’re considering – and the implications for your organisation. Boards and leadership that lack any commercial experience can struggle with ensuring that the right plans and measures are in place so that you can track the progress of your social enterprise activity, spot any warning signs and report back to investors. Not for profit boards can also be a little jumpy about the risk involved with borrowing money – so having a shared understanding and tolerance of risk is important.
Do you understand your potential investors?
Not all social finance is equal. Some investors and models put a higher value on the social return, others on the financial. It’s critical that you understand the funding model (as we said, there’s a lot of jargon and confusion out there) and what the investor is looking for. That way, you can select the right model and investor options for your business plan, and you’ll have a much higher chance of success in securing the funding.
Despite all the talk around social finance in recent years, this is still a relatively new field. For organisations developing their social enterprise activity into viable, self sufficient functions, social finance is the logical next step for growing their business. We expect to see this sector mature in the coming years to be a common form of financing social enterprises and not for profits.
Keen to investigate a social finance option for your NFP? Contact CBB’s General Manager, Consulting and Business Services Jane Arnott via:
Phone: 1300 284 364
Mobile: 0423 204 704
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