Social investment products
An investor puts some money into your organisation and they want to get that money back, often with interest.
These work like mortgages on a house: an investor provides your organisation with a loan against an asset (often a building or equipment) as ‘collateral’. You repay the loan on an agreed basis (eg. regular monthly payments) often including interest on top of the capital repayments. 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.
An investor provides your organisation with a loan that isn’t secured against an asset. You repay it on an agreed basis, often with an agreed amount of interest on top. If you don’t repay the loan, the investor can take you to court to recover the debt.
Case study: Read about Alt Valley Community Trust who have taken on multiple loans to grow the organisation as well as regenerate Croxteth to create jobs and training opportunities.
A crowd of supporters could contribute towards an overall loan, through a community bond or crowd-funding website. This could be a straight unsecured loan or a quasi- equity loan. The investee may also provide non-financial rewards.
Bonds are a standard practice in corporate financing and have recently been offered to charities and social enterprises as an additional way of raising large amounts of debt capital. A bond is an agreement between the charity/ social enterprise (the issuer) and the investors to borrow a sum of money for a fixed period of time (like 5 or 10 years) and pay a fixed sum every year (interest or coupon rate). The principal is repaid when the bond matures at the end of the agreed term. Bonds can be traded on secondary markets like stocks which can make them more attractive to investors.
Social impact bonds
Social impact bonds (SIBs) are a form of investment product originally developed by Social Finance to make it easier for charities and social enterprises to deliver payment-by-results contracts.
Investors in SIBs do not make a direct investment in the charities and social enterprises that are responsible for delivering the contracts: they invest in a special purpose vehicle (a legal entity that is specially setup to manage this investment) with a management agent. If the social enterprises and charities deliver the anticipated outcomes, and the expected savings to government, the local or national government pays back the investors with interest.
Case study: Read how the Consortium of Voluntary Adoption Agencies used an investment readiness grant to structure a £2 million social impact bond.
This is a debt-based product which is more flexible than a normal loan and acts a bit like equity (hence the name), with some similarities to an investor buying shares in a business.
Rather than paying back a set amount each month, your repayments are based on the performance of the business – such as profit or turnover. This model can be particularly useful if your organisation is a charity or Community Interest Company Limited by Guarantee, which cannot sell shares and take equity investment.
Ask yourself - Can you repay the debt? what will happen if you can't repay the loan?
An investor put some money in your organisation in exchange for part-ownership of the business.
The investor gets a right to share in any dividends which are paid out from profits. They may also sell their shares in the business to someone else as the business grows and those shares become valuable. This type of investment is best known from the TV show Dragon’s Den.
It is important to note that most charities and social enterprises cannot and do not sell shares and therefore cannot and do not distribute profits to shareholders. But CIC Limited by Shares, community benefit societies and some other co-operative and company structures can enable some organisations to issue shares and pay dividends within certain guidelines: this means they can still be recognised as social enterprises with a social purpose.
Case study: Watch how Fordhall Organic Farm used a community share issue to save their farm from takeover and turn it into a community asset.
Ask yourself - Do you want to give up a proportion of control over your business? Are you going to (or do you want to) make enough profit to give shareholders a return on their investment?
Get the guide
The social investment guide produced by Social Enterprise UK for Big Lottery Fund has more useful insights into which product might be best suited to your needs - including pros and cons of each type of product.