Financing Social Enterprises: A Systematic Approach

Financing Social Enterprises: A Systematic Approach

Chen Liu (Trinity Western University, Canada)
DOI: 10.4018/978-1-5225-6298-6.ch007

Abstract

This chapter discusses funding and financing issues of small and micro social enterprises (SEs) following a systematic approach. It conducts a systematic review of the SE financing literature and proposes a systematic model to examine the SE financing ecosystem. Specifically, the chapter discusses some traditional financing sources of SEs, including internal money, donations, government grants, and conventional debt and equity and examines SEs' advantage and challenges in securing financing using these traditional ways. To address the challenges of SE financing, this chapter proposes a systematic approach of solution and discusses some new and innovative sources of financing for SEs, such as the social impact bonds and the social venture capital. It then discusses crowdfunding and its best use for various types and stages of SEs. The chapter also suggests a list of future research ideas.
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Background

A social enterprise (SE) is an organization that operates to maximize both financial and social well-beings (Kerlin, 2010; Santos, 2012). Definitions of SEs reflect distinct regional and institutional differences (Kerlin, 2010). In the US, SEs are defined as “organizations that advances their primary social or environmental missions using business methods” (Social Enterprise Alliance, 2013 p.1). The American SEs mostly follow a market-based approach to generate income and make social impact (Austin et al., 2006; Dees, 1998; Defourny & Nyssens, 2010). In Europe and Asia, SEs mostly refer to organizations that follow the cooperatives tradition of collective social action (Defourny & Nyssens, 2010; Kerlin, 2010). Specifically, Spreckley (1981) describes SEs as “labor hires capital” to financial and social goals, rather than “capital hires labor” with the overriding emphasis on making a profit. The European Commission (2011) has defined three key criteria for SEs—social objective, limited profit distribution, and participatory governance that involves employees, consumers and other stakeholders.

Key Terms in this Chapter

Social Impact Bonds: Bonds that a government issues to private investors and only pays returns to these investors if the public project succeeds.

Social Venture Capital: A form of venture capital that provides seed-funding investment to achieve a reasonable gain in financial return while delivering social impact to the world.

Impact Investing: Investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.

Microfinance: A type of banking service that is provided to unemployed or low-income individuals or groups who otherwise have no other access to financial services.

Program-Related Investments (PRIs): Investments made by foundations to support charitable activities that involve the potential return of capital within an established time frame.

Social Enterprise: A social enterprise is an organization that uses business strategies (i.e., market-based approaches) to maximize improvements in financial, social and environmental wellbeing.

Crowdfunding: An umbrella term that refers to the practice of funding a project or business by raising many small amounts of money from a large number of people, typically through the internet.

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