Access to finance is often the issue that aspiring (and experienced) social enterprisers flag as the most challenging and most crucial for success. The introduction for the access to capital pillar on the social enterprise wiki describes some of the most pressing issues at play from a policy perspective in Canada:

All businesses require access to financial capital, especially investment and patient capital at start up and points of growth in the business. Social enterprises, by the nature of their predominantly non-share incorporation, have limited options beyond traditional grant models and straight forward loan arrangements. Grant income is not sustainable in the long term and loans, because they require an immediate repayment plan, could be a cash flow problem and often an expensive avenue to raise capital at a start-up or growth stage. New forms of patient capital and equity-like investments have to be developed, investor tax credits for social enterprise are needed and innovative share-based social enterprise incorporation models are required.  

I’d suggest that some of these areas require a closer examination, particularly as we move towards identifying key policy actions.

The role of various levels of government is extremely important when examining how to enhance access to finance. Governments must recognize that grants will continue to be important, but that there is flexibility to develop a range of mechanisms to deliver finance to address social issues. Proposals in the wiki describe how existing tools such as tax credits and loan guarantees can be adapted or amended to facilitate the flow of finance towards social enterprise. We know that these tools can be successful – experience from both Quebec and Nova Scotia, for instance, suggest that tax credits can be a useful incentive to create capital pools. As well, existing incentives in other sectors of the economy – think of the tax credits and other incentives provided to mining companies when prospecting – can be tweaked to accommodate the unique needs for social enterprise.

Government has the ability to catalyze the development of finance for social enterprise in other key areas as well. A major undertone to the discussion around access to finance finds its roots in existing legislative barriers and the lack of clarity around revenue-generating activities of nonprofits. Other jurisdictions have dealt with this through regulatory reform – the L3Cs in the US and the CICs in the UK – and there are proposals on the table to create similar structures in Canada. Again, a key message is that we do not have to “reinvent the wheel” when thinking about how to best structure legal and regulatory structures for social enterprise.

Another key issue today is that existing capital intended for social purposes is not being packaged into the appropriate products to satisfy the demand that already exists. For some social enterprises, there will always exist the case for some form of subsidy, and grants as the vehicle of choice. At the present time, there is a misalignment with too many organizations providing grants and relatively few providing other forms of capital – partly because of existing regulatory constraints on enterprising nonprofits. This has contributed to both an underdevelopment of the financial instruments such as patient capital and quasi-equity that appeal to social enterprises at different stages of growth and development. In the same vein, we need additional incentives to create a functioning “ecosystem” of intermediaries that can find, structure, and close deals.

It is insinuated that examples of “financial innovation” can be difficult to come by in Canada, but they do exist. The Quebec government facilitated the creation of La Fiducie du Chantier de l'économie sociale Trust (Fiducie) – a $52 million patient capital fund. A number of progressive Canadian foundations such as the Edmonton Community Foundation have already used PRIs to invest in social enterprise, and more are interested. Experience from the US and UK suggests that tiered capital structures can allow commercial and social investors to co-invest in ways that meet their individual investment preferences and segment returns based on risk tolerance; for example, foundations can provide “first loss capital” that can leverage more senior debt. Other less well-known Canadian examples, such as the work of the Canadian Alternative Investment Cooperative, should also inspire creativity around financial intermediation.

Finally, it is appropriate to note that while much of the discussion around finance centres on a lack of supply of finance, perhaps we should also pay closer attention to the demand side. There is some evidence – for example, the continued rise of socially-responsible investing and the rise of “philanthrocapitalists” seeking to generate blended value returns – to suggest that capital itself is not the binding constraint. What is less clear, I think, is the lack of investible and targeted opportunities for these investors, each of whom have differing expectations around risk, reward and social impact. I hope that we will have a better sense of this at the upcoming conference, which will draw both aspiring and established social enterprises from all across Canada. This, I believe, will also catalyze deal flow in the sector – and we’re already gearing up for the Social Enterprise Angels event hosted by Social Venture Partners Toronto.

What do you think? If you’re already involved in a social enterprise, what are your most pressing concerns around access to finance? Will the proposals adequately address these issues?

And if you’re aspiring to create a social enterprise, what challenges are you facing around access to capital? And is access to finance, in fact, your most important issue as you balance the various aspects of building and sustaining your social enterprise?

This post originally appeared Tonya Surman's blog on November 3, 2009

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