Types of social investment

Types of social investment

There are two main types of social investment

1. Borrowing (debt)

Taking out a loan which you agree to repay over a set period of time. Most debt investments are paid back with interest - a fee you pay to the investor for the use of their money.

E.g. an investor loans your organisation £10,000 and you repay a total of £11,000 at £229 per month over 4 years.

2. Shares (equity)

Selling shares in your organisation to an investor. Equity investors receive a share of any profits paid out by the organisation and get to have a say in how the organisation is run.

E.g. an investor pays £10,000 to own 10% of your organisation.

Explore specific types of social investment

Use our tool below to explore specific types of social investment funding

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Blended – part grant, part loan

Borrow

A package of funding that is a mixture of investment, that needs to be repaid and a grant that doesn’t need to be repaid. For example, a grant of £20,000 alongside a loan of £50,000 that needs to be repaid over 5 years with 10% interest.

Charity bonds

Borrow

A tradable loan from a group of social investors to a charity or social enterprise over a fixed period of time with a fixed rate of interest. For example, if you issued a £2million bond over 5 years at 2% interest in 2017, you would pay the social investors £40,000 interest each year and repay the £2million in 2022. 

Community shares

Shares

A withdrawable, non-transferrable equity investment into a cooperative or community benefit society. It is a form of equity because the investors get a share of the organisation.

Crowd-funded investment

Other

An investment that is raised via an online platform and not secured against an asset (a building or equipment). A ‘crowd’ of individual investors put (mostly) small amounts towards a loan to your organisation and you repay it on an agreed basis, usually with interest on top.

Energy Resilience

Other

There are social investors who are actively investing for energy resilience of charities, social enterprises and community organisations. 

 

Equity investment

Shares

An investment in exchange for shares in your organisation. For example, an investor pays £10,000 to own 10% of your organisation. Equity investors receive a share of any profits paid out by your organisation and get to have a say in how it is run, proportionate to the amount they invest.

Quasi-equity

Other

An investment that reflects some of the characteristics of shares but without your organisation offering up equity. Rather than paying back a set amount each month, your repayments are typically based on the performance of the organisation – such as profits or income. For example, you receive an investment of £50,000 and agree to pay the investor 2% of your annual income for 5 years.

Secured loan

Borrow

An investment that works like a mortgage on a house. An investor provides your organisation with a loan against an asset (often a building or equipment) as ‘collateral’. Alternatively, an organisation's parent company may offer its shares in the organisation as the collateral. You repay the loan on an agreed basis (e.g. regular monthly payments) usually with interest on top.

Social Impact Bonds

Other

A Social Impact Bond (SIB) is a payment-by-results contract where social investors pay for your organisation to deliver a service – for example, helping homeless people to find a home – and the Government repays the investors with interest if the service is successful. 

SIB Provider Toolkit

Social property funds

Other

Funds managed by a specialist firm, who raise money from investors, and then use the funds to buy property that can be used by a charity to deliver its services. The charity leases the property from the social property fund. 

Unsecured loan (incl. overdrafts)

Borrow

An investment that is not secured against an asset (a building or equipment). An investor provides your organisation with a loan and you repay it on an agreed basis, usually with an agreed amount of interest on top.

Here are some other funding options you might want to consider
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Accelerators, incubators and challenges

Early-stage investment and support – including training and office space – for business ideas that have the potential to scale. Many social accelerators and incubators are focused on ‘Tech for Good’ businesses seeking to use digital technology to make a positive social impact.

When might I use it?

If you have an early stage organisation needing investment and support to get started, or just an idea for a business you would like to develop.

Where can I get it from?

‘Tech for Good’ businesses or supporting social enterprises to develop digital projects are a particular focus at the moment. Have a look at the Entrepreneur Handbook's comprehensive list of Business Accelerators in the UK, Seed Legals accelerators list and keep an eye on Nesta's developing directory of accelerators and incubators in the UK.

Pros

  • Combination of investment, support and expert help to get your organisation up and running

  • Join a wider community of social entrepreneurs starting new organisations

Cons

  • In most cases, not open to charities, Community Interest Companies and Co-operatives

  • Mainly suitable for businesses – such as tech startups – that have the potential to grow very quickly

Conventional finance

Conventional finance – including high street banks – offers many of the same products available from social investors with the key difference being that the investors do not have a social motivation to their investment. Mainstream banks may also offer you an overdraft facility – an agreed amount of loan finance that is available to manage your cash flow when you need it.

When might I use it?

Conventional finance is worth considering at any point you’re seeking investment to see whether the options on offer are as good or better than what’s available from specialist social investors.

Where can I get it from?

High street banks and alternative lenders to SMEs. Investment readiness support may help you to approach other potential sources of mainstream finance.

Pros

  • Conventional finance may be able to offer cheaper loans than social investors
  • Conventional investors may be able to invest more quickly than social investors                              

Cons

  • Conventional investors will treat your organisation like any other business so may not be as patient as social investors if you cannot meet your repayment
  • Conventional investors are not specialists in social investment so may not understand your organisation

Friends and family

Financial support from people you know or who support you personally. For example, three friends/family members loan you £10,000 between them to get your organisation up and running. 

When might I use it?

When you’re getting started – at a point where your organisation has no track record or access to other forms of finance.

Where can I get it from?

Normally from people who you know well, or friends of friends who have an interest in what you’re doing and have some spare cash.

Pros

  • These investors support you and what you’re doing so are likely to be patient about when they get their money back

  • Investments are usually trust based so should not be time-consuming and complicated to arrange

Cons

  • If the organisation fails, your friends and family members lose their money

  • Problems for your organisation could have a negative effect on your personal relationships

Grants

Money paid to you to carry out a specific project (restricted grant) or to generally support your organisation’s work (unrestricted grant).

When might I use it?

Grants have many purposes but, when considered as a possible alternative to social investment, they might be used for developing new business ideas, testing whether a product or service works, or helping to sustain a business activity that is socially useful but not profitable. Grants may also available to help your organisation to become investment ready.

Where can I get it from?

A Government agency or grant-making trust or foundation. Funding Central, Beehive Giving and The Good Exchange are three different portals that will help you search for relevant funding options. 

Pros

  • Typically you don’t have to pay the money back

  • Funders may provide additional support and advice

Cons

  • Grant funders may insist you stick to the activities on your grant agreement, rather than adapting your business plan when circumstances change

  • It’s difficult to get grant funding to develop a business activity

More information

Reserves

Money that your organisation has in the bank as a result of making profits or generating surpluses.

When might I use it?

Spending your reserves, if you have them, is a possible alternative to seeking other investment or funding in any situation. However, this is a risky option if you don’t have large amounts in reserve. Many organisations aim to maintain a specific level of reserves to guard against a sudden drop in income and cover possible costs of closing the organisation.

Where can I get it from?

Reserves come from income generated through trading, donations or unrestricted grants.

Pros

  • The investment does not have to be repaid
  • If the investment is successful, you get all the profits or surpluses  

Cons

  • If the investment is unsuccessful, you lose the money
  • You are deciding whether to invest in yourself – an outside investment shows that someone apart from you believes your idea is worth investing in

Reward-based crowdfunding

Donations from lots of people who support what your organisation is doing, given in exchange for ‘rewards’ which can range from a thank you on your website, to merchandise such as branded bags and t-shirts, to the actual product you are raising money to develop.

When might I use it?

To raise small amounts (£2,000 - £50,000) to launch a new product or service.

Where can I get it from?

General crowdfunding platforms or crowdfunding platforms that specialise in working with charities and social enterprises.

Pros

  • You don’t have to pay the money back
  • It’s a good way of attracting customers and finding out whether people like your product enough to pay for it

Cons

  • It takes lots of time and effort, particularly if you don’t already have a large group of supporters
  • Creating rewards can be costly if your organisation does not have physical products to offer

More information