The activities of social enterprises are financed by a combination of earned income from thesale of goods and services (market resources), government subsidies and private contributions (non-market resources) and voluntary work (non-monetary resources).
Voluntary sector organisations have traditionally accessed external finance in the form of donations from members and supporters, or as grants from government, EU, charitable trusts and other funding organisations. Some social enterprises start life as voluntary sector organisations and gradually develop trading activities to generate sustainable earned income.
Although social enterprises strive to become viable trading concerns, making a surplus from trading, most forms of social enterprises require grant support during the start up and initial trading phase, although the extent of the required support varies. Some social enterprises find it hard to access any kind of grant or financial assistance. Initial grant support is essential for creating viable community businesses, particularly in areas where finance and skills are required.
It is widely believed that grants are essential to enable those social enterprises operating in difficult markets or deprived areas to deliver goods and services (Bank of England Report 2003). The recent Economic and Social Research Council research (ESRC, Nov. 2001) shows that only 3% of UK social enterprises operate without grant funding. But there is a difficulty of over dependency on grants. Grant funding is offered for a relatively short time, which makes it difficult to continue the project once the grant is finished. Also, it is difficult for grant aided enterprises to raise finance from banks, because the lenders do not consider their income is sustainable.
Raising finance is one of the major barriers for social enterprises and they are also more likely than Small to Medium Enterprises (SME?s) to have been rejected for finance. Furthermore, the majority of social enterprises perceive access to finance as the prime barrier to their set up, survival, expansion and growth (Chowdhury 2003 ? download report here).
Similarly, The governments PAT3 (Policy Action Team 3) also identified a lack of access to finance as a key inhibitor to the growth of social enterprise. Current grant regimes are rarely designed to help community organisations develop into robust social enterprises. However, PAT3 recommended that social enterprises be considered in national funding criteria for government programmes. Download report here
This section of the Sports Kitbag will provide information on the various grants, commercial and ?community? loans available. The relative advantages and disadvantages between grants, debt and equity loans are presented here in a Summary Table
A ?cocktail of funding? is seen as one way to develop your enterprise - with early dependence on grants at the start-up phase ? but with a transition over a period of time (say, 3 to 5 years) to becoming less reliant on grants. Sound business advice and planning is needed to manage this process.
This Overview was written and developed by Nizam Chowdhury (2005) from the Leicestershire and County Co-operative Development Agency (LCCDA). Elements of the Finance section have also been taken from, ?Unlocking the Potential ? a guide to finance for social enterprises? (Social Enterprise Coalition, 2004).
Copies of this guide are available from the Social Enterprise Coalition (SEC). Email info@socialenetrprise.org.uk for more information.