Are you being served?

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The recent state of social enterprise research, by SEUK, The People’s Business has reported that more than ever social enterprises are needing appropriate investment ‘Twice as many social enterprises (48%) as SMEs sought finance in the past 12 months and 39% cited access to finance as the single largest barrier to their growth and sustainability – the most common barrier experienced.’

This mirrors the findings of our work with Social Enterprise Mark holders who cannot access the right resource level for their growth – ‘The median amount of finance sought by social enterprise was £58,000′ – below the minimum thresholds of many specialist social investment vehicles. This supports other research identifying the need for smaller-scale, patient, risky and unsecured lending for social enterprises. David Floyd in ‘That Shrinking Feeling’ provides good commentary on this issue, although he argues that what social enterprises need most is more customers, but I would say it’s chicken and egg, without investment a social enterprise can’t grow to reach its full potential and access new customers.

At last the penny is dropping that social enterprises cannot access the finance they need through social investment channels – but where are the solutions? Indeed, small scale lending where it does exist, is so risky that it has to be backed up by very high interest rates to justify that risk, which puts social enterprises at a double disadvantage – not only do they have to demonstrate social impact, but also, this is not taken into account on the bottom line by the social investment sector, which in turn charges high interest rates to make its own business model work. The social enterprises then become financially uncompetitive with the private sector which can access cheaper equity and do not have to demonstrate social value. This unlevel playing field and to represent certified social enterprises are two of the factors that led me to volunteer for the HM Treasury Working Group on tax relief for social investment in social enterprise and the argument that I put forward for lower than commercial rate of return for investors. I urge all social enterprises to respond to the consultation and share responses with me.

Another investment channel is the banks. The ‘Banks and social enterprise’ article by Claudia Cahalane shows how much banks are courting social enterprises for current accounts but the unsecured lending offers are very thin on the ground. Why is it not possible to look at some kind of blended product from the banks? I know that there are banking rules that have become more onerous, but why can’t banks’ CSR programmes look at working with others to develop a CSR stream that provides such patient capital which does take into account social value and mission? We seem to be looking into a very small box with everyone saying why it can’t be done. Could this be a great publicity opportunity and chance for the banks to put their house in order and demonstrate their social credentials?

Meanwhile the social enterprises will struggle on with no investment and certainly no grants (now a dirty word). The upshot, as David Floyd says, is that we may not be shrinking in numbers, but we are shrinking in size (turnover). Isn’t it time to do some re-thinking? Who will dare to take this challenge on?

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2 responses to “Are you being served?

  1. Beanbags admin

    In terms of the chicken and egg situation re: investment and selling stuff, in making that point partly in the context of social enterprises being almost twice as likely (47%) to seek finance as SMEs (24%).

    There could be many reasons for this but I think there’s a chance that one of them is that some social enterprises – encouraged by the rhetoric of social investment – are looking for finance harder than they’re looking for customers or than they’re focusing on making sure they have products customers want to buy,

    A similar but slightly different concern I have is that social investment rhetoric is telling social enterprises that the goal is to scale up when, for the vast majority of mainstream businesses – even reasonably profitable ones – this is not the goal. Either way, there’s lots of social enterprises who have been encouraged to think about scaling up their businesses before they’ve actually got a business in any meaningful sense.

    There are some sectors where it does make (some) sense to think about scaling up before you know where your income is going to come from but these aren’t the sectors most social enterprises work in.

  2. I would agree with you on the issue of encouraging people to think of investment/grant rather than customers. I’ve lost count of the amount of CIcs that I have come across that have been set up under the misapprehension that it will lead to grant funding – in which case why didn’t they set up a charity. Maybe social investment is adding to this rhetoric, but it’s a common problem?

    Your second analysis about encouraging to scale up I think is more one that I would say has come about through the social investment debates and that is also the fault of the polcy-makers who only want to deal with large scale and don’t understand the nuancy of how a social enterprise can tackle a social challenge that others can’t. You also encounter this debate in the supply chain world where social enterprises are not big enough to for contracts. This is why I think social enterprises should be looking to diversify their income sources away from a reliance on government contracting

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