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The Financing of Social Enterprises: A special report by
the Bank of England
Kathryn Parker and Andrew Passey, 20 August 2003
Australian Centre for Cooperative Research and Development
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A Summary of the Report
The Bank of England's (BOE) report, published in May 2003, is the first time
that the BOE has really considered 'social enterprises' as a distinct form
of small or medium sized business enterprise (SME). It is also the first
time that it has considered giving access to these businesses, to the
various sources of finance. This is an importance step in social enterprise
development.
The report considers the demand and supply of external finance for social
enterprises in the UK, and includes a survey of 200 social enterprises (SEs)
and a matched sample of 123 for-private-profit small and medium sized
enterprises (SMEs), on their use of loan and equity finance. The definition
of a social enterprise (SEs) conforms to that used by the UK Department of
Trade and Industry (DTI), and is seen as:
"A social enterprise is 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."
In particular, the survey showed that access to finance, in one form or
another, was the main barrier to growth. Grant finance was the main form of
external finance for SEs, rather than debt or equity finance. However, the
data showed that 48% of SEs surveyed had sought external finance, a lower
ratio than the 59% of SMEs that had sought such finance. Demand for external
finance was more prevalent in well-established SEs with a large employee
base.
The reasons given for reluctance to seek external finance include lack of
need (for both SEs and SMEs), a preference for grant finance (35% of SEs),
risk aversion by board members (25% of SEs) and lack of income. Twenty-three
percent of those surveyed showed a reluctance to take-up commercial finance
for a number of reasons, including aversion to the risks of borrowing, lack
of information and knowledge of financial and banking business.
Report Recommendations
Demand factors
The report notes that the demand for debt finance is limited both by
availability of other, cheaper forms of funding, such as grants from
charitable foundations and government, and by risk aversion. The
recommendations include: