By Mark Daniels, White Box Enterprises COO.
We need to talk about the state of social enterprise finance in Australia. Our country lacks a comprehensive financial ecosystem to support its social enterprise sector, leaving a significant gap that needs to be addressed.
Jobs-focused social enterprises play a critical role in addressing social issues and creating employment opportunities, particularly for disadvantaged groups. They mostly do this with little, if any, funding to cover the high support costs required to successfully create employment for disadvantaged Australians.
Yet, unlike traditional businesses, social enterprises often struggle to access finance. Conventional financial products, designed for profit-driven companies, do not cater to the unique needs and constraints of social enterprises.
While products exist in this space, such as SEFA's outstanding work lending to purpose-driven organisations needing between $200,000 and $2 million in capital, there are no tailored solutions for jobs-focused social enterprises with weak balance sheets and the need for low-cost loans.
At White Box, we've faced this challenge. As an organisation we have an appetite to do big things that require a lot of capital. Despite a positive trading history, we have found it difficult to raise affordable capital. Jobs-focused social enterprises cannot afford to pay 15-25% interest.
Overcoming the structural barriers to capital
Social enterprises are often asset poor, and they have high-cost structures. Recent research from the Centre for Social Impact, shows that Work Integrated Social Enterprises (WISEs) have significantly higher cost structures than commercial businesses due to “impact costs” such as wraparound support services and property costs associated with training and accessibility needs. These factors contribute to poor balance sheets and limited profitability, making it nearly impossible for social enterprises to access traditional finance, despite many having lengthy trading history and a clear capacity to repay.
The opportunity cost of not having capital is significant. Social enterprises can't seize growth opportunities, which could mean not tendering for a contract because they lack the working capital required to deliver on it. For many social enterprises this means a lot of potential social impact is being unrealised.
The absence of appropriate financial products has led to a grant-dependent sector in Australia. This reliance on philanthropy for growth and capacity development results in intense competition for a limited amount of capital. If you don't win the competition your organisation is stifled. In contrast, the private sector enjoys a much wider array of funding options, allowing organisations to access capital as needed. This is a systemic issue that demands urgent attention and action.
A call to action
We need a more sophisticated capital market that reflects the diverse needs of social enterprises and recognises that they are different from private companies.
Social enterprises address market failures, such as ineffective employment systems, by creating businesses with employment models that are not attractive to the commercial market. In addressing one problem, another emerges: providing capital in a way that social enterprises can access and benefit from. Any solution must involve stakeholders who are prepared to use finance with concessional returns to achieve social outcomes. We need collaborative solutions with philanthropy and government to make this happen.
Internationally, countries like Canada, the US, the UK, and many in Europe have developed financial instruments specifically designed for social enterprises. These models recognise the high transaction costs and unique challenges faced by social enterprises, providing subsidised and accessible financing options.
A good example is The Growth Fund in the UK, a partnership between the National Lottery Community Fund, Big Society Capital and Access which blends grant funds and investment capital to offer small, flexible, unsecured loans, to organisations to create more social impact. By blending loan and grant funding they can cover the high transaction costs associated with making small loans, reduce investor risk, afford some loan failures, and keep finance affordable to social enterprises.
While we have seen some philanthropic organisations, like Macquarie Group Foundation and Paul Ramsay Foundation, offering blended or concessional capital in Australia, the pool is small, and doesn’t cater for sub-$500K amounts. Australia needs similar vehicles to The Growth Fund to support the development of blended capital at scale to unlock impact investment for the social enterprise sector.
Changing the system
We need to create an environment where social enterprises can access flexible, low-cost capital to achieve their missions and drive social change.
This isn’t just about providing loans; it’s about changing the way we see returns when finance is used to deliver social impact.
During my time working at Social Traders, I saw how systems change in the procurement sector enabled social enterprises, particularly in Victoria, to double and treble in size because their social value was being recognised in tender processes. If social value was also recognised in capital processes, I believe we would see a significant increase in the growth of social enterprises.
We need government and philanthropic organisations to recognise the systemic issue at hand and join us in creating a more functional capital market for social enterprises.
A SELF-made solution
To help make our case, White Box Enterprises is building the Sustainable Employment Loan Fund (SELF), a $5 million patient capital fund created to provide low-cost financing to jobs-focused social enterprises in Australia.
The fund is intended as a demonstration project, a canary in the coalmine, to show that with the right financial support, social enterprises can thrive, repay their loans, and significantly contribute to social and economic outcomes.
We acknowledge that not all social enterprises will succeed perfectly. Like all loans, there is potential for defaults, which is why we have incorporated first-loss capital to mitigate risks. The success of this fund could pave the way for larger investments from both government and philanthropy, encouraging the development of a more sophisticated capital market tailored to the diverse needs of social enterprises.
Conclusion
The current state of social enterprise finance in Australia is a barrier to growth and impact. To unlock the potential of social enterprises, we need to address this systemic issue by developing and demonstrating the effectiveness of suitable financial products. We hope the creation of the SELF is a crucial step on this journey. By providing the right kind of capital at the right time, we can help these social enterprises grow, scale their impact, and contribute to a more inclusive economy.
If you believe the system needs to change, join us. Together, we can create a financial system that truly supports the growth and sustainability of social enterprises, driving significant social change.