Traditional Financing Mechanisms and Social Enterprises

“If you think of charitable donations as a form of investment, and if an appropriate legal structure is created, then you have, by definition, a new class of investors and a new type of return.” This powerful line comes from this week’s reading, titled “A New Approach to Funding Social Enterprises,” and speaks to the vast gap in financing opportunities and options when we compare social enterprises and impact-focus organizations and those with a profit-driven bottom line. Indeed, as the social enterprise world blends mission-driven and profit-driven ideas, structures, and organizations, it becomes more and more apparent that financing, philanthropy, and other avenues for socially-inclined originations to raise capital are in need of a suite of innovative forms to better support organizations in their mission to impact end-users for the greater good.

While some advances in this area transpose more traditional investment models to the social enterprise space, as in the case of Citibank’s investment in KickStart International, other approaches have the potential to redefine how financing works for non-profits and social enterprises. Among the options covered this week, I was most attracted to the Bill and Melinda Gates Foundation’s shift to guaranteeing loans for organizations in lieu of traditional philanthropic grantmaking. As the article notes, philanthropy and government have long determined the financing and fundraising space for non-profits and, often, for social enterprises, too. The result is both a reliance on traditional grantmaking by organizations as well as a barrier to entry for many new or non-traditional enterprises that may blend profit and impact together in their work.

By guaranteeing loans for these kinds of organizations, the Bill and Melinda Gates Foundation is, in many ways, freeing these kinds of organizations from being eternally beholden to government and philanthropy, or, if they’re lucky, individual donors. Instead, loan guarantees open the potential options to include financing options that have traditionally been reserved for single bottom line companies. With an ability to finance, social enterprises, who have traditionally had difficulty demonstrating the credentials necessary for traditional financing, have the potential to borrow from the market. This could have a profound effect on the amount of capital able to be acquired and the speed at which a successful organization can scale up and expand its offerings.

That said, a significant caveat still remains, namely the basic infrastructure and indicators able to distinguish a good social enterprise investment opportunity from a bad social enterprise investment opportunity. While the authors do acknowledge this shortcoming and provide some consolation to the reader that the Rockefeller Foundation has begun to fund work in this area, it remains a considerable lift for both the social enterprise space and the traditional financing communities. When overcome, however, mechanisms like loan guarantees that open private financing options for social enterprises hold considerable promise in their ability to ignite a wave of innovation and rapid expansion for social enterprises and non-profit organizations.