A Sector Strapped for Cash: Why More Investment Should Be Directed to Social Enterprises

Almost two in five social enterprises (39%) say access to capital is the single biggest barrier to their organisation’s growth. Effectively financing this rapidly-expanding sector is critical to sustaining the growth of social businesses and fostering the innovation that the UK economy needs.

A quiet revolution in the way we do business is underway. The State of Social Enterprise Report (2015) found that social enterprises in the UK are outperforming their mainstream small and medium sized counterparts in nearly every area of business, including turnover growth, workforce growth, job creation, innovation, business optimism, diversity and start-up rates. Exceeding expectations in terms of both growth and impact, social enterprises are transforming the way mainstream businesses are run. Corporate social responsibility (CSR), traditionally existing on the fringes of business activity, is being forced onto the core agenda of every business.

This increasing commitment to the “triple-bottom line”- that is, an accounting framework with not one, but three parts: social, environmental and financial – has been driven by consumer preferences. Consumers priorities are changing and companies seen to focus on their values, not the bottom line, can gain a competitive edge in the market place. Fifty-five percent of global online consumers, for example, say they are willing to pay more for products and services provided by companies that are committed to positive social and environmental impact (Neilson, 2014).

Indeed, the race between brands to claim a social or environmental cause has been described as the new “gold rush” in branding. There are a number of big brands that are leading the way in this regard with Dove, Chipotle and Patagonia being among some of the most known companies trying to get out ahead of their competitors by aggressively backing social and environmental issues (The Guardian, 2016). Additionally, with certifying organizations such as Fairtrade and Bcorp entering the marketplace to enable consumers to distinguish between business rhetoric and truly impactful results, companies can no longer reap the branding benefits of being a force for change, without putting in the work.

The meteoric rise of social enterprises in the UK economy attests to the fact that businesses are responding these important changes in consumer preferences. In 2015, social enterprises had three-times the start-up rate of the mainstream SME sector. There are now 70,000 social enterprises in the UK contributing £18.5 billion to the UK economy and employing almost a million people.

While businesses are adapting to this new business environment, it appears the financial sector has been slow to catch-up. Big Society Capital (2015) notes that the 2015 calendar year saw 427m of social investment flow across 709 deals in the UK: a deal flow representing a more than doubling of deal-flow in the last five years or so. While this figure is equivalent to an annual growth rate of 20% a year, this rate of growth is insufficient to keep up with the proliferation and growth of social enterprises in the UK. Indeed, 44% of social enterprises sought funding or finance in the last 12 months and 39% believe its lack of availability is a barrier to their sustainability. In comparison, just 5% of SMEs think access to finance is a barrier (Social Enterprise Report, 2015). Peter Holbrook, CEO of Social Enterprise UK, concluded “Clearly social enterprises are hungry for finance, yet our research suggests they still face difficulties finding capital that’s right for their organisations.”

These figures emphasise the need to continue developing alternative sources of finance within the UK’s social investment market that meet the needs of growing social enterprises. While progress has been slow, change is underway. Chototel, for example, is a member of the Social Stock Exchange which is the world’s first regulated exchange dedicated to businesses and investors seeking to achieve a positive social and environmental impact through their activities. The strengthening of social venture intermediaries such as this represents one way in which cash-strapped enterprises can be connected with social investors. This change must be met with a rise in the quantity of funds available, as the finance sector realises that purposeful businesses can also be the most profitable.

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