Social investment that serves communities

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Community businesses tell us they spend too much time and energy seeking the blend of finance they need. To bolster communities, investors need to seek out and embrace new financial models.
29 May, 2024
Danielle Cohen

Danielle Cohen

Associate Director for Portfolio Management

We know community business works to build prosperous local economies and better places to live. But many community businesses still struggle to access investment, hampering their growth.

There is existing innovation in finance that we can look to. At last week’s closing event celebrating Access and Barrow Cadbury’s Connect Fund, we heard how their infrastructure projects improved access to social investment.

This comes hot on the heels of our recent Financing the future economy report, sharing insights into the best ways of financing community business growth.

Social investment

Many social investors succeed in funneling much-needed money into economically deprived communities through offering a variety of loan products that recognise social impact. We applaud their willingness to take on risk, to lend relatively small amounts, to recognise social impact and to be as affordable and patient as their money allows.

But often community businesses struggle to secure this kind of funding – and that limits their growth. High costs can be a barrier, showing community businesses are still perceived as high risk. And investment can require community businesses to make a cultural shift to consider taking on debt. This is particularly acute for organisations led by women or people from minoritised communities, who are underrepresented among recipients of social investment.

Community businesses need finance that is affordable, patient and flexible. They tell us they spend too much precious time and energy shopping around and fulfilling the demands of multiple funders and investors to get the blend of finance they need.

Subsidy and sustainability

Social investors (warning: big generalisation coming up) may protest that they are constrained by the parameters of the funding they themselves receive. They can’t put their money out more cheaply or flexibly, they argue, because they need to pay it back with interest, within a timeframe. There is also a pressure to make funds evergreen to demonstrate that impact investment is financially sustainable.

This focus on financial sustainability risks overriding the strong signals from the sector. Sustainability is important: without it, there won’t be social investment funds to serve community business in the future. But subsidy needn’t be a dirty word. It can make investment more flexible, enable it to take more risks, and can buy more patience. It can also fund the activities that make financial products more accessible – much like the Connect Fund did – building support infrastructure to help community business meet their ambitions. The fund included peer support to develop confidence, as well as trusted, independent business advisors to support plans for growth.

The future

The cost of these activities cannot always be shouldered by investees, and nor should it. There is a role for grant, or subsidy, alongside loan finance to help community businesses to take on social investment.

We need investors to seek out and embrace new financial models that can incorporate grant with loan, creating innovative new products that respond to the specific financial needs of community business, recognising that independent support is critical for organisations to take on investment.

We are supporting innovators in this field, particularly at the regional scale where a place-based approach can effectively support community business. We’re partnering with Kindred to develop a social investment pathfinder, with North East Combined Authority to pilot new forms of social investment, and with West Midlands Combined Authority to develop the market.

We’re looking forward to sharing more of our learning – to help shape a social investment market that better serves community business, and continuing to bring different sources of finance together to offer the patience, flexibility, and affordability that the market demands.