Social Enterprise UK published their biennial State of the Sector survey this week and we are looking in detail at what the data is telling us. The survey reports on the barriers faced by social enterprises to scale and to be sustainable, and as in previous years, it addresses concerns over access to finance.
One of the reasons that Access’s Growth Fund was established was the clear pattern of demand from the sector for smaller amounts of finance than was otherwise available. Looking back at the survey data over the last few years, the median amount sought by social enterprises has moved slightly: from £58k in 2013, £60k in 2015, £80k in 2017 and back down to £50k this year. (2017 seems a bit of an anomaly in this dataset.) The average investment size for the 335 organisations who have received an investment through the Growth Fund is £63k, so still very much in the sweet spot compared to the rest of the social investment market.
Interpreting exactly what is going on in terms of the sector’s views about access to finance isn’t easy because some of the questions about applying for and receiving grants are mixed up with questions about accessing repayable finance. The issue here is that grant may be for a variety of purposes (revenue, capacity building, capital) whereas repayable finance is much more likely to be for investing in existing or new activities. The motivations of applying for a grant to supplement your revenue are quite different from seeking a loan to scale your enterprise activity. Applying for grants is also, on the whole, much more competitive than seeking repayable finance. Comparing them is therefore tricky. If you strip out grant from the headline barriers cited in the report then operational challenges become more significant than a lack of access to finance.
In fact, overall the picture in terms of accessing repayable finance seems to be a pretty positive one. More organisations are applying for a loan than in previous years, up to 32% of social enterprises this year compared to 23% in 2015. (An additional 10% of respondents answered that they had applied for blended finance. Although this term is not defined, it presumably means a blend of loan and grant. This wasn’t an option reported in previous surveys so we might therefore add this to the 32% seeking a loan – bringing the total to 42%.) There is a slight increase in those seeking an overdraft (13% this year up from 6% in 2015). The small proportion seeking equity has not changed significantly.
In terms of success in obtaining finance, most organisations seemed to get roughly what they were seeking. The median amount received was £40k; not that far off the median amount requested of £50k. Across the spectrum of different scales of finance requested there are not significant disparities in what was made available. Only 16% of those seeking finance didn’t end up raising anything. (I assume these figures exclude grant but the text isn’t 100% clear on that point.)
So if most organisations get most of the finance they are seeking when they apply for it, why is obtaining debt or equity finance still a key barrier cited by 18% of social enterprises?
34% say that the amount of finance available is not sufficient. This probably refers mainly to accessing grant as it doesn’t seem to reflect the evidence on accessing loans highlighted above. 31% say the finance is not well signposted. Good Finance plays a key role in helping organisations to navigate the market for social investment, but knowing where to find grants can be very tricky. 43% say the process of applying is not easy to navigate. That is a fair criticism of all funders and investors and something we must all continue to improve.
Interestingly, the price of investment doesn’t appear here as a reason for why accessing finance is a barrier. When this question was last reported on in 2017, only 5% of respondents who didn’t apply for finance said that cost of finance was the reason they didn’t apply. This seems at odds with the broader narrative that social investment is too expensive.
If the data from the survey paints a positive picture about the current availability and take up of repayable finance for social enterprises then the next challenge is to ensure that the supply of finance continues to meet the needs of the sector.
The Growth Fund was responsible for 29% of social investment deals in 2018 reported via the BSC open deal level data, and has significantly driven down the average size of investment available to amounts much closer to what social enterprises are asking for. However the Growth Fund will be fully committed by around the end of 2021. Further supply of the subsidy necessary for this sort of investment activity to happen must be secured before then or the supply of this finance will dry up. Future blended finance programmes with a broader remit could also address some of recommendations cited in the report, allowing finance to be increasingly “more patient, more responsive, more flexible, more speedy and more attuned to a social mission”.
Building on important datasets like this from SEUK, the sector as a whole should push the case for this to happen.