Social investment: The Basics
In this blog series, we’ll bring you the basics of social investment.
You are a social entrepreneur, you have big plans for your business and you know you can have a positive impact on your community. So far, so good, but how do you get there?
If you are in Scotland, you have probably already tapped into the vast ecosystem of support, from workshops and one to one support to local networks and grants. And if you are on a path towards growth, social investment may be on your radar. But what is it, how does it work and is it right for you?
In this blog series, we’ll bring you the basics of social investment to help you understand if it is the right route for you, the organisations that provide it and how other social entrepreneurs use it to achieve their ambitions.
So, what is social investment?
In simple terms, social investment refers to any form of repayable finance that you can use to achieve your social mission. There are two main types of repayable finance: debt (when you borrow money which then you must pay back, often with interest) and equity (when you sell shares of your business to an investor).
In Scotland, social enterprises are generally ‘asset locked’, so equity investment is not suitable. So broadly speaking when you hear the term social investment, it refers to loans. And this type of investment is ‘social’ because investors are looking for financial and social returns.
There are plenty of resources out there that explain in more detail what social investment is, the different types and how it works. Check out the Good Finance website and Social Investment Scotland website for more information. These two short videos also give you an overview of what social investment is and why you may decide to use it:
Good Finance- What is social investment?
Foundation Scotland- What is social investment?
Social investment v grants
Social investment and grants are not mutually exclusive nor should be seen as either-or, but you may wonder, why should I seek social investment instead of grants? The answer will depend on the stage of your business and your ambitions.
Grants are useful, particularly at a start-up stage to help you kick-start income-generating activities and build a track record. They can also be the perfect solution if you are looking to deliver a specific project or programme. However, grants tend to be ‘restricted’, meaning that you can only use the monies secured for specific purposes. Grants programmes also tend to be very competitive and may have long application periods that do not align with the needs of your social enterprise.
Social investment may be the right avenue if you:
- Have high start-up costs (equipment, for example) that cannot be covered through grants.
- Need to manage your cash flow. For example, a bridging loan can help you cover costs upfront so you can deliver a contract/service before income for that service comes in.
- Want to grow and expand. For example, hire new staff to deliver more of your services or improve IT infrastructure to make your product available to a larger market.
Sometimes, a blend of grant and investment will be the most suitable solution. This is when tapping into the support of a business advisor can help you work out what’s right for you. Many social investors offer additional support or training to make sure social investment is the right avenue for you. Check out Social Investment Scotland’s Online Learning Hub for upcoming webinars.
What about high street banks?
Traditional financial institutions can also help with your plans. If you have a business bank account with a high street bank or building society, you will likely have an overdraft facility, which can help to manage cash flow, for example.
While it’s worth checking what loan products are available through traditional finance providers, they do not always understand social enterprise, your mission or impact. If you need patient capital or your business model is complex, a high street bank may not be as flexible if your circumstances change or you struggle to make repayments.
Now you know what social investment is, and you may even be interested in accessing it, but how do you assess if your social enterprise is ready for investment? Learn more about investment readiness in the next blog in our series!