Financing Options for Social-Purpose Businesses (for-profit)
While social entrepreneurs are creating “blended” types of organizations, delivering social and/or environmental benefits along with financial returns–those organizations who provide financing are distinct: the “investors” who invest in or lend to for-profit social-purpose businesses and the “funders” who grant funds or, less frequently, lend to non-profit “Financing Options for Social-Purpose Businesses (for-profit)”. This article focuses on how to finance your social-purpose business (SPB).
In order to turn your idea into a business, you need financing. Financing is the money or assistance you need in order to start a business delivering a service or selling a product based on your idea. Here are four questions to ask yourself as you pull together your plan for seeking financing:
- Do I have the characteristics to be a successful entrepreneur?
- Are you ready to accept outside investment to build your business?
- Are you able to bootstrap your business?
- If you have decided to work with outside investors, what type of financial return can they expect?
Lower-than-market rate returns
If you expect a lower-than-market rate return from your social-purpose business and/or the sector you are operating in is not one regularly funded by traditional investors (for example, Education, International Development, Programs for Disadvantaged Members of Communities), then your prospects will be a narrow sub-set of the investor and lender community. These are groups willing to accept lower financial returns in exchange for tangible social and/or environmental benefits. You can use the following link to help identify targets:
- Social Capital Partners provides links to organizations that will help finance social ventures. Social Capital Partners uses the term“social enterprise financing” to refer to for-profit funding sources and“social enterprise grants and venture philanthropy” to refer to non-profit funding sources.
If you are targeting a market-rate return and the industry sector you are focused on attracts angels (angel investors are individuals with a high net-worth who invest directly in businesses) and private investors (like Clean Technology or Health), then you can develop a financing plan that targets traditional equity investors. You will also likely be able access to traditional lenders, subject to the normal restrictions for loans to any new business. You can use the following links to identify potential targets:
- The Government of Canada’s Sources of Financing Database
- National Angel Capital Organization
- The Canadian and US venture capital association membership lists
No financial return
Finally, if you do not expect your business to generate any financial return, but will contribute significant social and/or environmental returns, yours is likely a social enterprise rather than a social-purpose business. You should consider whether a traditional corporate structure is the most appropriate vehicle for you to deliver your product or service and to attract the funding necessary to support your initiative.
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MaRS Discovery District. (2009). Social Venture Finance, Enabling Solutions to Complex Social Problems [white paper] . Retrieved July 29, 2009