There is an increasing need for the non-profit sector in Canada to seek new innovative ways of accessing capital to meet their goals. But before we go in-depth on the emerging world of social finance, it’s important to explore the different types of financing that exist for an organization.

Financing is the money acquired to run an organization and achieve its mission. All types of organizations must make decisions around financing with respect to their business objectives, ability to secure alternative investment, risk tolerance, and other related factors. Although, financing options vary based on the organization’s legal structure there are typically three types of financing options available to non-profits or social enterprises: Grant Funding, Debt, and Equity.

Grants Funding

For most organizations in the non-profit sector, their financing is largely made up of grant funding and charitable donations. The nature of grant funding varies – for example, a non-profit may require ongoing grant funding for program delivery, while an initial grant may be sufficient to seed a social enterprise. The advantages of grant funding are that these funds do not require repayment. However, the disadvantage is that funding will have some expectations tied to a specific program or goal where funds cannot be directed to ongoing core operations.

Debt

Debt financing refers to a loan (capital borrowed to run a business or organization) which is issued by traditional financial institutions, such as banks and credit unions. The loan has to be repaid and involves a specific contract with conditions and an agreement to repay a set amount of money with a set interest rate. Traditionally, this has been a difficult type of financing to access for non-profit organizations, as they lack the means to generate revenues or have a history of steady cash flows to qualify. However, as a response, innovative financing tools have been developed to come up with different models for providing finance to this sector. For example, government funds could be leveraged in the form of loan guarantees to provide favourable access to capital for social enterprises.

Equity

Equity financing involves a financial investment in exchange for an ownership stake in the organization. This has been least accessible to non-profits as their legal structure prevents any other parties from taking ownership share. Often, however, this type of finance is an important component to allow successful organizations to scale up. As a result, funders and lenders are developing new types of finance strategies, such as quasi-equity structures, as an alternative funding source.

We’ve asked our featured contributors for Topic 2: What are the different types of finance that exist in Canada? to discuss the following questions:

1. Discuss the pros and cons of the existing funding sources for non-profits and social enterprises.
2. What other types of financing options are available?
3. What is necessary for non-profits and social enterprises to do to capitalize on these funding sources?

Share:  

• 
• 
• 
• 
• 
• 
•