Types of social investment | Good Finance (2024)

When might I use it?

Either as a new organisation needing some grant funding to reach the point where you are able to take on investment and repay it, or as an existing organisation looking to expand but your new activities may not generate enough profit to repay an investment without some grant funding.

Where can I get it from?

From specialist social investors or grantmaking trusts. It’s also possible for organisationsto create blended finance themselves by applying for grants alongside loans.

Browse our investors and advisors page to view organisations offering blended finance.

Pros

• Bridges the gap between grant funding and investment

• Reduces the risk that you will not be able to repay investment

Cons

• Not widely available

• Only likely to be available for investments of £250,000 or less

Other considerations

Not all blended finance products in the social investment market are publically available. In some cases, charities or social enterprises may apply to an intermediary for a loan but the intermediary may approach a grant funder to ask them to subsidise the deal with a grant.

When might I use it?

If you are a relatively large charity or social enterprise needing unrestricted funds to scale up your activities or develop a new line of business.

Where can I get it from?

Charity bonds are typicallyissued with the support of specialist intermediaries. The investment may come from institutional investors, high net worth individuals or retail investors.

Browse our investors and advisors page to view organisations providing support on charity bonds.

Pros

• Source of large scale unsecured finance with fewer restrictions than bank finance

• Opportunity to publicise your charity or social enterprise and involve supporters as investors

Cons

• May be expensive to set up

• Not suitable for high-risk investments into small organisations

More information

• Know How Non-Profit- Charitable Bonds

• Example case study -Golden Lane Housing

It is ‘withdrawable’ because the investor can take their money out of the organisation if they choose to. However, unlike conventional shares, a holder of community shares can not transfer them to another person and the shareholder has just one vote, regardless of the amount invested and the number of shares held.

When might I use it?

If you’re a local organisation needing investment to get up and running. For example, you’re a group of local people who want to buy the village pub and need to raise £150,000 to buy the lease and cover initial running costs.

Where can I get it from?

There are various ways to invest in community share offers including through online platforms. The Community Shares Unitand Community Shares Scotland will provide help to organisations looking to set up offers. Power to Changeoffers a Community Shares Booster programme which offers support and potential match funding to help you meet your target raise.

Pros

• Many community shares investors are local people who want a community owned business in their local area because they are potential customers for it

• Many investors put in small amounts and are happy if the organisation continues to exist rather than expecting a return on their investment

Cons

• Best suited to organisations that have large numbers of individual paying customers

• Only available to organisations set up as Co-operatives and Community Benefit Societies

More information

• Community Shares Unit - What are community shares?
• Know How Non-Profit - Community investment
• ​Example case study -Burley Gate Community Shop and Post Office

When might I use it?

Unsecured loans can be used for a range of purposes. Crowdfunding loans are a particularly useful way to raise small amounts (£5,000 - £50,000) relatively quickly.

Where can I get it from?

Specialists platforms, such as Ethex, Crowdfunder and Community Chest - offeropportunities to crowdfundwith match funding from Big Society Capital. Some mainstream peer-to-peer business lendersmay also lend to charities and social enterprises.

Pros

• A crowd of supportive investors may be more likely to provide you with the amount of investment you want on the terms you want it than an institutional investor

• Investors in social crowdfunding are likely to be supporters and also potential customers for your organisation

Cons

• Takes time and effort to get investors interested, particularly if you don’t already have a large group of supporters

• Difficult to raise large amounts through crowdfunding unless your crowd is huge and/or very wealthy

More information

• Nesta - Crowdfunding good causes

• UKCFA - Members

• Example case study - The Freedom Bakery

When might I use it?

If you are an organisation that cannot sell shares, such as a charity or Company Limited by Guarantee but need an investment that you only repay if your business is successful. It may be more attractive to a social enterprise that cannot offer shares for whom aloan would be too risky. Quasi-equity potentially provides a more distributed sharing of risk and reward between investor and investee.

Where can I get it from?

Quasi-equity investments may be available from specialist social investors.

Browse ourinvestors and adviserspage to view organisations offering quasi-equity products.

Pros

• You do not have to repay money you don't have

• Investors may offer additional support as they only get their money back if you are successful

Cons

• If your organisation is very successful you are likely to repay more through quasi-equity than you would if you took on a loan

• Quasi-equity is not widely available as many investors believe these deals are too risky and too complicated to set up

More information

• Access & Flip Finance - Social Shares: Risk finance for charities and social enterprises
• CAF Venturesome - Quasi-equity:Case study in using Revenue Participation Agreements
• Example case study, Pioneers Post - Care organisation's success proves social investment market strength

When might I use it?

To cover some or all of the cost of buying the asset. For example, your organisation’s office building, a community asset such as a community centre, or expensive equipment such as a bus.

Where can I get it from?

Secured loans are available from social banks but may also be available from high street banks. Foundations and individual social investors might also make secured loans.

Browse ourinvestors and adviserspage to view organisations offering secured loans.

Pros

• Interest rates likely to be lower than unsecured loans

• Common form of investment

Cons

• If you don’t repay the loan, the investor may have the right to take possession of the asset and sell it to recover the debt

• Not available if you don’t own a building or another large asset or have a parent entity willing to offer its shares in an organisation as collateral

More information

• Know How Non-Profit - Secured loan
• Example case study - London Early Years Foundation (LEYF)

SIBsare not "bonds" in the conventional sense. While they operate over a fixed period of time, they do not offer a fixed rate of return. Repayment to investors is dependent upon specified social outcomes being achieved. Therefore in terms of investment risk, Social Impact Bonds are more similar to that of an equity investment

When might I use it?

If your organisation provides or would like to provide a service that delivers measurable social outcomes that could save the Government money. For example, helping people to find jobs or preventing prisoners from reoffending.

Where can I get it from?

As a first step, information is available from the Government’s Centre for Social Impact Bondsor Big Society Capital. Approach them for further guidance if a SIB seems like a good option for you.

Pros

• Social investors cover the cost of delivering the service so your organisation definitely gets paid
• Many investors in SIBs will support you to improve the way you deliver your service and help you to measure your impact more effectively

Cons

• Setting up a SIB can be costly and time-consuming
• SIBs only work if your organisation delivers a measurable social impact and a commissioner(for example, a council) believes it will save them money

More information

• Department for Culture, Media & Sport - Social Impact Bonds: an overview
• Department for Culture, Media & Sport - Centre for SIBs
• Big Society Capital - Social Impact Bonds
• Example case study - Aspire Gloucestershire

When might I use it?

To raise money from individual investors. Social Investment Tax Relief (SITR) is available to investors buying equity or providing unsecured loans to charities, Community Interest Companies and Community Benefit Societies. The current maximum amount of SITR-eligible investment an organisation can receive is around £1.5m if they've been trading for less than 7 years.

Where can I get it from?

Some specialist social investors run SITR-backed funds – and some crowdfunding platforms enable organisations to offer SITR investments. Big Society Capital provides a guide for organisations interested in creating their own SITR-loan offer.

Browse ourinvestors and adviserspage to view organisations who run SITR-backed funds.

Pros

• It incentivises investors to make earlier stage (potentially riskier) investments

• It is available to both borrowing and equity products

Cons

• Not available for investmentsinto property

• There are a number of excluded activities - seeSocial Investment Tax Relieffrom Big Society Capitalfor more information

More information

• VIDEO: What is social investment tax relief?
• Big Society Capital - Social Investment Tax Relief
• Big Society Capital & Flip Finance - DIY social investment guide
• Bates Wells Braithwaite - A simple guide to financial promotions
• Example case study - Fareshare South West

When might I use it?

If you require substantial housing stock for the service you're delivering. For example, you're a charity that provides houses and an assisted living service for disabled people.

Where can I get it from?

A few organisations, such as Cheyne and Funding AffordableHomes, run large specialist fundswhich provideinvestment into large scale housing solutions. It is also possible to access this kind of investment through individual landlords via bespoke arrangements.

Browse ourinvestors and adviserspage to view organisations running social property funds.

Pros

• You can access property without needing to take on large amounts of debt to buy it
• Particularly relevant for providing housing for vulnerable people, where large amounts of money are required

Cons

• Only likely to be available for relatively large projects – worth £10 million or more

More information

• Example case study - St Mungo's Broadway

When might I use it?

Unsecured loans can be used for a range of purposes including getting started, ‘working capital’ to manage gaps in your income and ‘scaling up’ to grow and expand your business.

Where can I get it from?

Specialist social investors, angel investors and someand some grant-making trusts. Some mainstream business lenders may also lend to charities and social enterprises.

Browse ourinvestors and adviserspage to view organisations offering unsecured loans.

Pros

• You don’t need to own a building or offer an assetto get one
• They are relatively simple, easy-to-understand investment products

Cons

• If you don’t repay the loan, the investor can take you to court to recover the debt
• Interest rates are likely to be higher than a secured loan as it is riskier

More information

• Know How Non-Profit - Bridging loan
• Know How Non-Profit - Overdraft facility

When might I use it?

If you have an early stage organisation needing investment and support to get started, or just an idea for a business you would like to develop.

Where can I get it from?

‘Tech for Good’ businesses or supporting social enterprises to develop digital projects are a particular focus at the moment. Have a look at the Entrepreneur Handbook's comprehensive list of Business Accelerators in the UK, Tech London's list of incubators, andkeep an eye on Nesta's developingdirectory of accelerators and incubators in the UK.

Pros

• Combination of investment, support and expert help to get your organisation up and running

• Join a wider community of social entrepreneurs starting new organisations

Cons

• In most cases, not open to charities, Community Interest Companies and Co-operatives

• Mainly suitable for businesses – such as tech startups – that have the potential to grow very quickly

When might I use it?

Conventional finance is worth considering at any point you’re seeking investment to see whether the options on offer are as good or better than what’s available from specialist social investors.

Where can I get it from?

High street banks and alternative lenders to SMEs.Investment readiness support may help you to approach other potential sources of mainstream finance.

Pros

• Conventional finance may be able to offer cheaper loans than social investors
• Conventional investors may be able to invest more quickly than social investors

Cons

• Conventional investors will treat your organisation like any other business so may not be as patient as social investors if you cannot meet your repayment
• Conventional investors are not specialists in social investment so may not understand your organisation

When might I use it?

When you’re getting started – at a point where your organisation has no track record or access to other forms of finance.

Where can I get it from?

Normally from people who you know well, or friends of friends who have an interest in what you’re doingand have some spare cash.

Pros

• These investors support you and what you’re doing so are likely to be patient about when they get their money back

• Investments are usually trust based so should not be time-consuming and complicated to arrange

Cons

• If the organisation fails, your friends and family members lose their money

• Problems for your organisation could have a negative effect on your personal relationships

When might I use it?

Grants have many purposes but, when considered as a possible alternative to social investment, they might be used for developing new business ideas, testing whether a product or service works, or helping to sustain a business activity that is socially useful but not profitable. Grants may also available to help your organisation to become investment ready.

Where can I get it from?

A Government agency or grant-making trust or foundation. Funding Central,Beehive Giving and The Good Exchange are three different portals that will help you search for relevant funding options.

Pros

• Typically you don’t have to pay the money back

• Funders may provide additional support and advice

Cons

• Grant funders may insist you stick to the activities on your grant agreement, rather than adapting your business plan when circ*mstances change

• It’s difficult to get grant funding to develop a business activity

More information

• NCVO - Funding: grants
• Directory of Social Change - Government funding portal
• Beehive Giving
• The Good Exchange

When might I use it?

Spending your reserves, if you have them, is a possible alternative to seeking other investment or funding in any situation. However, this is a risky option if you don’t have large amounts in reserve. Many organisations aim to maintain a specific level of reserves to guard against a sudden drop in income and cover possible costs of closing the organisation.

Where can I get it from?

Reserves come from income generated through trading, donations or unrestricted grants.

Pros

• The investment does not haveto be repaid
• If the investment is successful, you get all the profits or surpluses

Cons

• If the investment is unsuccessful, you lose the money
• You are deciding whether to invest in yourself – an outside investment shows that someone apart from you believes your idea is worth investing in

When might I use it?

To raise small amounts (£2,000 - £50,000) to launch a new product or service.

Where can I get it from?

General crowdfunding platforms or crowdfunding platforms that specialise in working with charities and social enterprises.

Pros

• You don’t have to pay the money back
• It’s a good way of attracting customers and finding out whether people like your product enough to pay for it

Cons

• It takes lots of time and effort, particularly if you don’t already have a large group of supporters
• Creating rewards can be costly if your organisation does not have physical products to offer

More information

• UKCFA - What is crowdfunding?
• School for Social Entrepreneurs -Crowdfunding for charities and social enterprises