5 Ways Social Enterprises Can Finance Growth
by Don Shaffer
Social entrepreneurs seeking growth funding often get caught up in the culture of venture capital--they position their enterprise as a rocket business, look for a miracle angel investor, and start giving away equity. They're not thinking about how the investors will get their money back, or whether other options might better support their goals.
At the same time, conventional funders often see social enterprises as too risky or too hard to understand, especially if they're building a new supply chain, sacrificing some profit to maximize social value, or using a hybrid business model.
Fortunately, there are ways around traps and barriers like these for social enterprises that are past the bootstrapping stage. First, here are a few general guidelines:
- Before you seek financing, define what you ultimately want to do. Are you planning to sell this business? Do you see it as a legacy business that you're building to last? A long-term, slow-growth plan won't nix your chances for funding; you'll just need to look at different kinds of funding.
- Seek out funders that focus on social enterprises and that have expertise in your field--they'll have a better understanding of the market opportunity, and they won't expect your business to compromise its mission in order to grow.
- Expect a funder to add value beyond financing, such as connections to a network of advisors or technical assistance.
Below are the ins and outs of five funding options--some top of mind, and some you may not have considered.
Debt financing Borrowing money over a defined period of time--from a bank or an alternative lending institution--allows you to maintain your ownership position and thus retain control of the enterprise. This is a good option for enterprises that have the cash flow to make payments and the assets to secure the debt.
Debt financing takes a variety of forms, each with its own underwriting standards: working capital lines of credit, asset-based loans (secured by account receivables, inventory, and other assets), equipment loans, mortgages, and so on. You will want to seek advice on the best structure. The key questions to ask at the outset are: How will I be able to pay back the loan, and what is the lender likely to do if things go sideways?
Don Shaffer is the president and CEO of RSF Social Finance, a San Francisco-based organization that lends money to path-breaking social enterprises, provides impact investing vehicles accessible to a wide range of investors, manages grant funds, and works to build a finance infrastructure that will allow social enterprises to thrive.