 different
capital for different needs
By
Gita Rao
Investment
Officer, Calvert Foundation
Access to
capital is one of the main challenges social enterprises face when they
are looking to grow or sustain their businesses. Over the past 18
months, Calvert Social Investment Foundation, an industry leader in
community investing, has been raising funds and providing loans at
affordable interest rates to social enterprises across the country. We
are often asked by social enterprises how they can access this type of
capital and what financial hurdles must be cleared to attract and manage
these investments.
Understanding the Spectrum of Available Capital
The capital available to social enterprises includes grants, venture
capital, standard equity investments, and loans. When planning for
growth or other financing, it is important that a social enterprise
identify which form of capital best aligns with its needs. Further,
while investors in this sector share the common goal of supporting
social entrepreneurship, there is great diversity in their risk
appetites and product offerings.
Many social enterprise businesses are in the start-up or early growth
stage and therefore require equity, as opposed to debt, to fuel growth
and operations. Venture capital or equity is well-suited to enterprises
seeking capital for “soft” expansion costs, such as technology, business
planning, marketing, and staff. These capital providers tend to be
willing to take on more risk and take a longer view of their investment
dollars.
Loans, on the other hand, are appropriate for financing short-term needs
such as receivables, equipment purchases, and working capital. Some
lenders may require collateral, though all require clear sources of
repayment (contracts, purchase orders, collateral, etc.).
What Investors Are Looking For
One factor critical to Calvert Foundation’s consideration is whether
there is a social cost that requires a subsidy (in the form of low-cost
or flexible, below-market-rate financing) to ensure effective delivery
of goods or services to low-income communities. One example would be a
social enterprise that employs workers who require mentoring or training
that exceed standard practice. This is categorized as a “social cost” of
doing business.
In addition, Calvert Foundation looks for enterprises that have positive
net worth and have had break-even or profitable operating performance
for a period of at least three years. This performance demonstrates that the
business model is sustainable. Finally, it is important that there are
clearly stated assumptions about future revenue to repay a loan or
provide dividends.
Investment Criteria and Checklist
All social enterprise businesses must demonstrate the capacity to repay
investors. Typically, screenings for financial soundness and the ability
to repay focus on the following factors:
-
Strong
financial condition – The overall financial health of the social
enterprise business must be good, and in the case of a loan, there
should be positive net worth that exceeds the value of the proposed
loan. The amount of the loan is usually determined by the size of
the business's assets or revenues. Lenders providing $100,000 or
more in capital typically require that the enterprise have $1
million or greater in assets or revenue.
-
Management – It is important to prove that the social enterprise
has a stable management team with a strong reputation among industry
peers and investors. Investors are likely to focus on management’s
ability to develop and follow a business plan as well its previous
experience in entrepreneurship. Investors may also assess the
potential for “key person risk,” or the extent to which the success
and growth of the business relies on the founder/CEO/executive
director. Ideally, key person risk should be mitigated by a
succession plan and a management team comprising experienced
professionals.
-
Production track record – A viable social enterprise should
demonstrate a consistent history of providing high-quality products
or services, coupled with repeat buyers and renewed contracts which
signal a level of success.
-
Diversified funder and/or revenue base – Strong relationships
with multiple grant funders, investors, and customers are important.
In addition, ideal nonprofit social enterprises would also show
consistent year-over-year support from grant providers, including
future commitments.
For a
checklist of Calvert Foundation's investment qualifications, please
click here.
 For
over 10 years, Calvert Social Investment Foundation, a nonprofit
501(c)(3) organization, has been working to make community investment a
safe and logical option for retail and institutional investors seeking
to make a positive social impact. Calvert Foundation’s community
investment portfolio includes social enterprises, fair trade coffee
cooperatives, community development finance institutions, and other
nonprofits.
Gita Rao is an investment officer at Calvert Foundation, where she
manages the Social Enterprise and Fair Trade sectors of the portfolio.
Visit
www.calvertfoundation.org for more information.
This article is part of an ongoing series with investors to highlight
what they look for when making investments in social enterprise. For the
previous article in this series and other articles on capital, read “Ready,
Set, Loan!” by Jeannine Jacokes of Partners for the Common Good and
the
Treasure Hunt Top Ten List of Web Sites for Resources and
Information on Capital.
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