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In her post entitled “What is Social Finance?”, Tamsin introduced the concept of social finance and outlined the four key categories in which we can see social finance at work: public sector commissioning, asset locked social enterprises, mission-led private sector companies and social investors. This week we take an introductory look at the role charities have to play in the social finance space.

For charities, social finance can mean two things: investments into a charity or investment by a charity.

As Tamsin pointed out, accessing social finance as a borrower requires a sustainable revenue-generating business model that is capable of creating sufficient profit to enable the charity to cover its operating costs and repay the investment. Inevitably, this means that some charities will not be capable of accessing social finance as an investee. Grant-making charities, for example, do not operate on an income-generating model that would enable them to make repayments. That being said, an increasing number of grant funders now make soft loans* too, to protect the long-term viability of their activities, which could mean that they would be able to access social finance in some form. Other charities operate in a space where an enterprise model can seem impossible to achieve. Homelessness charities, for example, may consider that because they work with people in need there is no potential for income generation. In many cases that may be true but equally there are numerous examples of charities setting up social enterprises that employ homeless or marginalised people, and that are capable of generating income which enables the charity to service debt. On this blog in coming weeks we will be looking at examples of charities that have developed such income streams.

Another challenge is that the enterprise activity needs to be sufficiently robust, of sufficient scale, and generating sufficient profit to enable the charity to access social finance of any magnitude. This can be a real challenge for charities and their social enterprises because it is very much a chicken-and-egg situation: the charity may have an idea to develop an appropriate enterprise activity but it needs the finance to develop it and traditional lenders may not be willing to finance activities that have no proven track record.

This is where social lenders – lenders who understand the specificities of the charity and social enterprise arena, and are willing and able to guide borrowers through the borrowing and business development process – play an important role. Philanthropically-minded private investors can also have an impact here, and one of the real opportunities in the social finance space is to harness the philanthropic intent of private individuals – not just to provide financial investment in social enterprises, but to contribute their expertise and time to help get young projects off the ground. Endowed charities can also play a role here, in providing grant funding or soft loans to help get social enterprise off the ground in the start-up phase when they are unable to access any other form of funding.

Which brings us to the second meaning of social finance for charities: investment by charities into social enterprises whose activities support the charitable purposes of the charity. This can take any number of forms. The most common form is a charity that establishes a revenue-generating social enterprise and invests into it. To take the example cited above, a homelessness charity setting up and investing into, say, a community interest company or trading subsidiary to operate a café that trains and employs homeless or marginalised people is making an investment into a social enterprise. However, there are examples of more arm’s length relationships, such as a charity investing alongside private (non-social) investors and institutional lenders into a private, for-profit company whose activities advance the purposes of the charity. Such social or “mixed-motive” investments are on the rise but in many trustees’ minds there remains a tension between their traditional duties to invest to obtain the best financial return and to apply the funds of the charity to advance its purposes. On this blog we will explore how some charities have found the right balance of the two and how recent developments – including the Charities (Protection and Social Investment) Act 2016 – have evolved the landscape.