What kind of finance might be available?
Recognising a need to move away from grant dependence and encourage greater innovation, leaders in the field contend that social sector organisations need access to a diverse range of finance in the same way that commercial businesses do (Cohen, 2014 and Addis & Blackburn-Wright, 2014). This is particularly true if they are to grow and maximise their social impact. Social impact investment has the potential to offer social sector organisations access to a similar range of financing options as private enterprises.
Market participants are now thinking about alternative sources of finance, including:
- Debt finance: a social sector organisation borrows money that it must repay, usually including some component of interest. Debt finance is the most common form of social impact investment in Australia, but there are concerns about the ability of social sector organisations to service debt. Some alternatives to traditional debt finance offered by mainstream lending institutions include patient finance, like long term loans, and debt finance with ‘soft terms’ (e.g. no or low interest loans). The financing of Goodstart childcare centres is a well-known example.
- Equity finance: investors buy and hold shares in a social sector organisation that generates income and capital gains for those investors. This is less common in social impact investing because many social enterprises lack regular revenue streams. Additionally, some social sector organisations can find it hard to issue shares because of complexities around legal forms and investors can find it hard to exit investments. Patient finance, like equity investments that look for a return over 10 to 15 years, or equity capital with below market returns may be alternatives to traditional investment on commercial terms. A good example of equity finance is a recent deal structured by STREAT to double its capacity.
- Social benefit bonds, where private investors fund a social sector organisation to deliver a service and the government only pays if predetermined social outcomes have been achieved. This results in private investors sharing financial risk with government in return for market returns on their investment. Social benefit bonds are a new financial instrument and can be thought of as a type of debt finance. Read more about NSW’s social benefit bonds.
How do I attract finance?
To attract finance and assure investors of their capacity to service debt or pay returns, social sector organisations need consistent income. Assets may also be beneficial. For example:
- revenue generated by the sale of goods or services
- regular or long term grants
- secure, and preferably longer term, service contracts with government
- their own real property portfolios
Organisations seeking finance will benefit from strong skills in business and financial planning to engage with capital markets and help establish themselves for the long term. Organisations need to be able to demonstrate sustainable business models and develop attractive, investment-ready proposals in a language that investors can understand.
How best to raise capital for an enterprise or program and which investors to approach depends on the:
- stage of development of the program or enterprise
- legal structure of the organisation and risk appetite
- purpose of the finance (e.g. for operations, infrastructure, etc.)
- investor motivation and risk appetite
- potential for investor returns.
We recommend seeking qualified legal and financial advice if you’re interested in social impact investment. You may also like to visit the Community Finance Portal to find potential sources of capital.
Where can I get advice and assistance?
Organisations interested in participating in a social benefit bond or other social impact investment should speak to their financial advisor or contact a social impact investment intermediary. Expert legal and tax advice may also be required.
As a result of the strong demand for advice through the Expert Advice Exchange, the Office of Social Impact Investment has worked with some advisory firms to develop introductory advice packages for social sector organisations. These packages are designed to provide guidance in specific areas. However, they are for information only and may not be suitable in all circumstances. You should seek your own professional advice. The NSW Government accepts no liability for the contents of the packages or for any loss or damage arising from any use of or reliance placed on them.
Kemp Strang Lawyers, October 2015
A summary of general information on governance matters for not-for-profits.
How to change legal structure from an incorporated association in New South Wales to a company: Charities guide
Prolegis Lawyers, September 2015
A step-by-step guide for NSW charities to transfer their registration from an incorporated association to a company structure.
Corrs Chambers Westgarth, November 2015
A discussion of the fundamentals of intellectual property, including the nature, types and ownership of intellectual property.
Specialist Australian social impact investment intermediaries
A number of specialist intermediaries have emerged with the growth of social impact investment in Australia. Intermediaries can help social entrepreneurs and organisations to develop ideas and business cases, build investment readiness and capability, attract investment and may provide finance themselves. Intermediaries include:
- Blue River Capital
- Foresters Community Finance
- Koda Capital
- School for Social Entrepreneurs
- Social Enterprise Finance Australia (SEFA)
- Social innovation in Western Australia
- Social Outcomes
- Social Traders
- Social Ventures Australia (SVA)
- The Difference Incubator
- National Australia Bank (NAB)
There are also other intermediaries. For example, the Commonwealth Bank Australia and Westpac acted as intermediaries in Australia’s second social benefit bond, the Benevolent Society bond. The NSW Government does not endorse or recommend any of these organisations as intermediaries for social impact investments.
Other tools and resources
Justice Connect’s Not-for-profit law information hub is a comprehensive legal resource for community organisations.
Justice Connect’s social enterprise guide talks through the important factors to consider when starting a social enterprise. It focuses on the legal issues associated with choosing the right structure for your organisation.
NSW small business toolkit provides information and tools to help you start, run and grow your business in NSW.
Putting the pieces together: A business planning guide for social enterprises is a joint publication from Social Ventures Australia and Parramatta Council that provides step-by-step guidance to aspiring social entrepreneurs.
Social Traders’ The Builder, a comprehensive step-by-step guide on how to build a social enterprise.