Why Social Investment | Social Investment | Good Finance

Why Social Investment

There are a number of reasons why your charity or social enterprise might need social investment.

1. Kick start your organisation

You’re an entrepreneur with a great idea for a new social venture, or an existing organisation looking to start something new, so you need money to get it off the ground.

Most start-up social enterprises are relatively high-risk investments because new businesses do not have a track record of success.  Even if you have some evidence that someone wants to buy the products and services you’re going to sell, there is no way of being sure they’ll buy from you (or that you’ll make a profit) until you start.

For most social start-ups, unlike their private sector equivalents, it is unlikely that your organisation will be able to offer investors a large financial return, even if successful. This means you will need to find investors who are able to accept that there is a larger chance they will not get their money back and a more limited chance they will make a substantial return.

Fortunately, social investors want their money to be used to create social value and those who invest in start-ups are often prepared to accept the ‘high-risk, low return’ reality.

What do you need money for?

At the start-up stage, your main challenge is to get your business to the point where you can find out whether people want to buy your products or services.

Possible uses for investment 

  • Product or service design and development
  • Delivering products and services to customers
  • Sales and marketing
  • Investment in systems (eg. IT, online, data)
  • Staffing – paying yourself and others

How will you pay the money back?

You need to consider both the model for repaying an investment and how repaying an investment will affect your organisation. If you haven’t reached the stage where you’re generating income, it’s not appropriate (and potentially irresponsible) to take on a loan that needs to be repaid immediately. But assuming you can find investment that doesn’t require this, you need to be very clear about how you’ll be able to repay it in future from your trading activity.

What support/input do you want from investors?

Different types of investors can offer (and want) very different levels of involvement in your social venture. You should ask yourself whether you are looking for an individual or organisation that gets actively involved with developing your business, or one that invests and leaves you to get on with it.

Freedom bakery

"If I were to go down the traditional grant funding route, I'd probably be looking at more time to see an application through. And I thought, if we cut out the middle man and just do it ourselves, it would be more efficient and ultimately cheaper." Matt Fountain, Freedom Bakery

Read more about how Freedom Bakery used social investment to kick start their organisation.


2. Maintaining cash flow

You’re a charity or social enterprise that has been running for a few years, generating positive social impact and revenue, but need a cash injection to deliver a service, finance a contract or cover costs. 

What do you need money for?

This would normally be cash flow: your organisation is profitable overall and your income covers costs, but it doesn’t always come in before the bills need to be paid. There are investment products that are designed to help organisations manage these gaps and dips between people paying you and you having to pay bills and other organisations. These are:

  1. Working capital – you might need investment to manage your cash flow so that you have enough money in the bank. This gives you working capital, which is used to finance the everyday operations of your organisation.
  2. Bridging loan – a one-off loan to bridge a bigger gap in cash flow. For example, if payments don’t come in as expected, or there is an unexpected cost that needs to be paid. A standby or overdraft facility can also be used at such times.

How will you pay the money back?

The key question here is whether you are planning to pay the money in one lump sum (having been paid for contract delivery) or to repay the money in stages over time. Or is the facility available to use in a more expected, regular way? This will normally be specific to your organisation’s situation and the type of products, services or contracts involved.

What support/input do you want from investors?

Different types of social investors can offer very different levels of involvement in your social enterprise or charity. 

In some cases, specialist social investors may be prepared to make an investment on the condition that they get involved in the business and help you to make it more profitable. You may welcome this kind of help but you may disagree with investors’ ideas about how you should change the business.


3. Growth and innovation

You’ve decided you want to scale-up so you can:

  • bid for bigger contracts
  • sell your products and services to more people
  • deliver a wider range of products and services
  • deliver your products and services across a wider geographical area

All of which helps you to create more social value and change more people’s lives.

What do you need money for?

It’s important to be clear about how you’re going to scale up or innovate and what resources you need to do it. This could be, for example, to:

  • Employ more staff to do more of what you’re doing
  • Employ specialists to enable you to bid for new contracts
  • Invest in opening in a new location
  • Pay for sales and marketing

How will you pay the money back?

If you get an investment that enables you to grow your organisation and it’s already profitable, then should be able to repay an investment on a regular basis with part of your increased income that comes with that growth. You need to think about the risks if growth (and profit) does not happen in line with your predictions.

What support/input do you want from investors?

Some investors are keen to help organisations to scale-up their activities. This can be useful in providing you with the additional skills and expertise needed to take your organisation to the next level. There are also a growing number of support programmes, accelerators, and incubators dedicated to charities and social enterprises looking to scale up. More information on this can be found in other funding options section of types of social investment.

Building site

"Our investors enabled us to grow as a business by providing financial support. But they've also enabled us to grow by giving us expertise about how to grow. Tom Storey, K10

Read more about how K10 used social investment to grow their organisation.


4. To buy an asset 

Charities and social enterprises may be able to improve their long-term financial stability by buying an asset.

An asset is anything your organisation owns that is worth something – usually a building or some equipment that’s vitally important in enabling you to do business, such as a bus for a community transport enterprise like HCT. For many organisations, the cost of renting their premises is the second biggest cost after staff salaries. Buying the building where you’re based can be a good way to get some long-term benefit from money otherwise used for rent. You can also potentially rent out space to others, and benefit from any increase in value.

There are downsides: As with personal homes, buildings can also decrease in value and require ongoing maintenance. Also, not all organisations are fit to be social landlords alongside their core business.

In recent years, there has also been growing support for Asset Transfer. This is where a charity or social enterprise takes ownership of a building previously owned by part of the public sector; the building is usually one that is particularly valued by the local community.

What do you need money for?

Examples of what you could use the money for include:

  • Buying a building
  • Renovating a building to get it to a point where it’s useful
  • Buying equipment to help your organisation improve its productivity

Mortgages to buy buildings are one of the most common forms of investment available to charities and social enterprises from both mainstream and social investors. Indeed, secured loans make up a significant proportion of the current social investment market.

How will you pay the money back?

If the asset you’re buying is the building where your organisation is based, then you won’t have to pay rent anymore but you will still need to be clear about how you’re going to afford the cost of repaying the investment – plus any additional costs you’ve taken on as a result of buying the asset. You may be required to make the asset part of the security for the investment, which means that the asset is potentially at risk if you default on your repayments to investors. 

What support/input do you want from investors?

Some social investors are particularly focused on helping charities and social enterprises to buy community assets. Are you looking for a social investor that specifically understands the project you’re undertaking or do you just want a mainstream investor who will provide you with investment to let you get on with it?

Homes for Good

"We needed a significant amount of money. It's capital intensive buying properties. So that was really why I approached a number of different social impact investors and banks." Susan Aktemel, Homes for Good

Read more about how Homes for Good used social investment to buy assets.


More information

For more information on why you might need social investment, see Social Investment Explained, a guide by Big Potential and SEUK.