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The Financing of Social Enterprises in the UK
Bank of England, 20 May 2003
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The Bank of England today publishes a special report on The Financing of
Social Enterprises. This follows a request last year by the Department of
Trade and Industry that the Bank should "review the provision of debt and
equity finance to social enterprises".
The report draws on a new survey of 200 organisations, compared with a
sample of conventional small and medium sized (SME) businesses. This
evidence has been combined with wide ranging consultations with social
enterprises and finance providers.
The report finds that demand for debt finance amongst social enterprises is
constrained both by the availability of other, cheaper forms of funding such
as grants, and by a cultural aversion to the risks associated with
borrowing. Despite this, however, there is evidence that social enterprises,
particularly the larger, more established organisations, do use a range of
external financing techniques involving banks and other lenders, such as
Community Development Finance Institutions (CDFIs). Borrowing is used for a
variety of reasons, in particular to address cash flow difficulties or to
purchase or develop assets. Social enterprises seem more likely than SMEs to
have been rejected for finance, though many of those rejected by one lender
appear subsequently to be successful with another.
In terms of equity finance, the report finds little evidence of demand for,
or supply of, conventional venture capital or business angel finance to the
social enterprise sector. The report concludes that this is not a result of
market failure but instead reflects the specific characteristics of the
social enterprise sector. In particular social enterprises may not generate
a commercial financial return, may be unable or unwilling to concede
ownership to external investors and may not offer a conventional exit
strategy for investors.
However, there is evidence of demand for some form of long-term 'patient'
finance, particularly at the start-up or expansion stages, in which
investors are willing to accept lower financial returns in exchange for
social outputs. Measures to encourage the supply of patient capital will
need to be accompanied by efforts by the social enterprise sector to
identify and promote suitable investment opportunities.
The report puts forward a number of recommendations, which the Bank believes
could improve investment readiness; facilitate the supply of conventional
debt finance by mainstream and social banks and CDFIs; and increase the
supply of patient finance for development.
Patricia Hewitt, Secretary of State for Trade and Industry, said "The Bank
of England review has an invaluable role to play in strengthening social
enterprise in the UK. As the first thorough and independent analysis of the
financing of the sector, it will be an essential guide for Government,
lenders and investors to ensure social enterprises have better access to the
right types of funding. I requested the review in recognition of the value
of social enterprise as a growing sector and one that is bringing about
important social change."
Sir Edward George, Governor of the Bank of England, said "The Bank has a
long-standing interest in the financing of SMEs, where our aim has been to
promote a better mutual understanding between lenders and borrowers. As with
conventional businesses, social enterprises need to have access to a range
of different sources of finance. I very much hope that this report will help
in achieving that objective."
Notes to Editors
1. The report is available, free of charge, from
www.bankofengland.co.uk/financialstability/businesshouseholdfinance/smallfirms
or by ringing the Bank's Public Enquiries Group on 020 7601 4878.
2. The request from the DTI to the Bank was made as part of the DTI's
strategy for social enterprise, launched in July 2002. The DTI report Social
Enterprise: a strategy for success is available on
www.dti.gov.uk/socialenterprise/index.htm#Strategy
3. The DTI defines a social enterprise as "a business with primarily social
objectives whose surpluses are principally reinvested for that purpose in
the business or in the community, rather than being driven by the need to
maximise profit for shareholders and owners." Examples range from small
community businesses to national organisations such as The Big Issue and The
Eden Project.
4. Community Development Finance Institutions (CDFIs) are defined by the
Community Development Finance Association as sustainable, independent
financial institutions that provide capital and support to enable
individuals or organisations to develop and create wealth in disadvantaged
communities or under-served markets.